The Value Rotation: In Search of Global Value Funds

It hasn’t been easy for value investors for most of the last decade.

However, since Christmas 2021 with the MSCI World Growth index down nearly 11% in a month, and previous high performing technology-heavy growth funds like Scottish Mortgage and Edinburgh Worldwide off some 30 to 40% from their peaks of a few months ago, recent declarations of the irrelevance or death of value investing seem premature.

It’s particularly poignant to mark the potential revival of value investing in the week which confirmed the absorption of the value-investing based Scottish Investment Trust into the management of the JP Morgan Global Growth and Income Trust (the review prompting this was referenced in a previous blog post).

Ironically, in the month to January 21st 2022 the Scottish Investment Trust was the top performing trust in the UK-based Global investment trust sector, with a Net Asset Value increase of 5.1% starkly contrasting with Scottish Mortgage’s fall of 13.8%.

More broadly, funds managed in the value style such as Schroder Global Recovery and MI Thornbridge Global Opportunities sit near the top of the global fund sector performance league tables over one to twelve months, as do funds specialising in previously out of favour sectors associated with value investing such as energy and finance.

Where next?

With interest rates starting to rise, inflation seemingly more durable than envisaged and more increases in both likely in 2022, could the long-anticipated rotation from growth investments to value investments not only be underway, but starting to become firmly rooted?

The honest answer is, “It’s impossible to be certain”, but it’s likely that the more the macroeconomic and political environments deviate from the low inflation and low interest rate climate of the 2010s, the more will the best performing funds and investments of the next few years differ from those that have performed best in the last few years.

With this in mind, how should a private investor like myself, hoping to live for another three decades, react? 

The question assumes greater significance for me in early 2022 as having just turned 55 (!) and elected to access my work pension, I will be in the fortunate position of having some capital to deploy [assuming urgently needed house refurbishments don’t consume all of it], with the specific purpose of creating a capital backstop for possible later life health and personal care costs 20-30 years from now.

If at least part of such a long-term growth portfolio should be allocated towards ‘value’ investments, what are the options?

UK Value?

It’s not just because they’re talking up the investments they manage that UK fund managers continue to highlight the absolute and relative cheapness of the UK stock market. As a recent discussion by the JO Hambro UK Equity Income fund highlights, by the end of 2021 the UK market had rarely been cheaper.

The potential for a re-rating of the UK market is seen in the strong performance of UK value-based trusts and funds such as Temple Bar and Aurora in early 2022.

However, for my own purposes given I already hold a some UK value investments, such as Chelverton UK Dividend and Aberforth Split Level Income, I’m not rushing to add to my UK exposure.

I also have some longer-term concerns about the UK political backdrop. 

The travails of the Conservative Party currently look deep-seated, and it’s probable that in 2023/24 the stock market will wake up to the risks of a Labour-led government and/or the Scottish independence referendum that might be the price of SNP support for a minority Labour administration. The difficulties of Brexit are minor compared to the potential complexities and uncertainties of Scotland voting to break away from the Union. A tail risk of this kind merits caution before assuming a large UK weighting.

Where to find global value?

As noted in the previous blog post discussing the demise of the Scottish Investment trust, there are surprisingly few, if any, value-based global investment trusts.

The AVI Global Trust might be considered as such, although it eschews the one-dimensional value label, and sees itself as a 'third way' combining growth and value styles. 

Taking AVI Global on its own investment merits, the access to a broad range of holding companies (such as EXOR, Pershing Square and Christian Dior) and special situations is attractive, so it’s a strong candidate for part of this long-term growth portion of my portfolio.

What I’d really like to invest in is a global small cap value proposition.

However, attempting to find one is problematic. Most small cap value ETFs are regionally specific, centred on the USA or Europe especially.

Likewise, there are a number of regionally focused small cap value funds and trusts, notably De Lisle America, Fidelity Asian Values, Nippon Active Value.

Thus far, only two actively managed global value funds have caught my attention and seem available to a UK retail investor (via the AJ Bell platform).

Global small and mid cap value

The Kopernik Global All-Cap Equity Fund is managed by experienced US-based value investor Dave Iben. 

As of December 2021, Morningstar’s portfolio analysis gives its portfolio a price-earnings ratio of 6.68, surely one of the cheapest portfolios available.

That said, the focus on energy, materials and emerging markets, notably Russia, may deter many and performance has been volatile: falling more than 10% short of both its benchmark and peer-group in 2017 and 2019, but significantly outperforming in 2020 and 2021.

I am tempted, albeit for a small portion of my funds.

The latest quarterly webcast for the Kopernik fund (20^th January 2022) is available here.

Palm Harbour Global Value Fund

The fund that intrigues me the most is also one of the smallest and least well-known.

The Palm Harbour Global Value Fund was launched in 2019 and cities the usual value investing names (Buffett, Graham, Klarman) as inspiration.  Seeded by, and closely related to the COBAS asset management firm established by the Spanish value investor Francisco García Paramés, as of January 20^th 2022, the Palm Harbour fund had gained 39% since launch.

Morningstar’s portfolio analysis gives its portfolio a price-earnings ratio of 7.60.

With holdings such as International Game Technology, an Italian-American lottery company, and Ginebra San Miguel, a Filipino gin producer, the fund is nothing if not distinctive and idiosyncratic. It is in Morningstar’s Global Small/mid-cap sector with 55% of the holdings categorised as small cap and 17% micro-cap by Morningstar.

Only 15% of the fund’s holdings are domiciled in North America, 63% in Europe, and a sprinkling in Japan and Asia.

So, at last, a genuinely global small cap value fund!

There are some concerns: the fund had a very poor early 2020; it is only valued once a week, on a Wednesday; there is just one named fund manager, Peter Smith; and at just under five million euros in size its long-term sustainability might be a worry.

However, if you’re going to invest in actively managed funds rather than trackers or ETFs (a debate for another time…) then funds like this that differ markedly from the benchmarks and provide access to holdings otherwise out of reach are likelier to add something to one’s portfolio.

Having had a fruitful E-mail exchange with the fund (itself a useful albeit not clinching indicator for a prospective investor) the Palm Harbour Global Value Fund is likely to be part of my later life growth portfolio.

One lesson of early 2022 is that capital growth is not always best served by self-defined growth funds – there remains a place for investments in the value style. Value funds can grow in value.