Value strategies - practical

[hiriskpaul]

Having convinced myself that value strategies are likely good value now (viewtopic.php?f=8&t=19635), I have come to the matter of how to invest. I am not interested in researching and tracking a portfolio of individual companies. Instead I want to consider collectives. I have identified a few global value ETFs with low p/b that are worth further consideration:

VVAL Vanguard Global Value Factor UCITS ETF (p/b 0.9)
IWVU iShares Edge MSCI World Value Factor UCITS ETF (p/b 1.04)
XDEV Xtrackers MSCI World Value UCITS ETF
EMVL iShares Edge MSCI EM Value Factor UCITS ETF (p/b 0.81)

My preference is for a low dividend yield (although above average dividend yield goes with the territory) as the investments will likely be made outside tax shelters (I may switch over some ISA/SIPP investments as well). For the same reason, I would prefer distributing ETFs rather than accumulating ones, but will consider accumulating ETFs if necessary.

XDEV follows the same index as IWVU, is slightly cheaper, but is smaller and accumulating.

If anyone knows of any more LSE listed global value ETFs, I would be pleased to hear about them. I have looked on justetf.com and it does not show any more, but does not show VVAL or IWVU either! I would also be very interested in LSE listed small cap value ETFs. None show up on justetf.com.

Can anyone suggest ITs that follow a value or small cap value strategy? The AIC site does not provide a simple way of finding these. It splits between growth, growth/income and income and I am after value which is not necessarily the same as income. I would prefer unloved ITs trading on a large discount to NAV

(I already hold Aberforth Smaller Companies and JPMorgan Smaller Companies)

[hiriskpaul]

Take a look at my other thread if you are looking for an explanation of what is meant by value investing. It was discussed there. Happy to continue the discussion there if you do not understand what the strategy means.

[torata]

I don't know of any UK listed ETFs other than the four you mentioned.

Slightly off topic, but may be of interest to some: I invested equal amounts in both VVAL and VMOM, the Vanguard momentum factor ETF, in March 2016. The intention was to rebalance between the two, but the difference between them has never felt big enough to justify it.

Currently VVAL is up 50% and VMOM is up 62% since purchase. VMOM has only really pulled away from VVAL since May this year, but we'll see if that continues.

torata

[hiriskpaul]

Holding/rebalancing between VVAL and VMOM seems a good move to me. Over the last few years though, the general rise in the market and fall in GBP has been the dominant factors, boosting both, so overall I would agree there has been little point rebalancing. When the stock market boom is less pronounced I think you will see much less correlation between VVAL and VMOM.

I bought VVAL in April 2018 for my daughters' Lifetime ISAs. It has turned out to be very unfortunate timing, down 1.6% since. At the same time I bought Vanguard North America ETF, which is up 28.5%. Up until about a year ago, VVAL was beating the market, so it looked as though value was coming back into fashion, but since then growth has surged again and value floundered. Similar to 1999 in some respects, though not as extreme.

Value held up a lot better following the dot-com/growth bust and Woodford was hailed as a genius. I am prepared to bet value stocks will hold up better again once the next crash comes along.

[hiriskpaul]

I have found very few global ITs that confess to follow a value strategy. Perhaps most of the value managers have been sacked? Unsurprisingly, the ITs I have identified have all experienced awful performance compared with their growth peers and the global market. Discounts though are still not as large as I would have liked. The 3 I have identified so far are these:

EP Global Opportunities (disc -5.2)
AVI Global (disc -11.1%)
Scottish Investment Trust (disc -8.7)

I need to look into these in more detail. If anyone has any thoughts and experiences I would be interested to hear about them.

I suspect that there are value investors amongst the Global Equity Income sector as performance has been poor across the whole lot over the last 5/10 years, but I would prefer not to have too much focus on income.

p.s. It is interesting to see the AIC stats from 10 years ago - AVI Global, which used to be called British Empire, was one of the top performers over 5/10 years!

[hiriskpaul]

It will annoy you to know that I am a holder of AVI (BTEM). In my growth portfolio since the yield is under 2%, as an adjunct to Foreign & Colonial. A concentrated basket typically of other fund managers and investment houses some not available to retail. It sees value where others see value. Struggled like many have struggled but has picked up nicely this year since it changed its name.

It gives me exposure to regions and sectors and asset classes I might not otherwise invest in directly.

Top holdings include Fondul Propietatae which started life I think to compensate victims of the communist regime in Romania and holds a basket of stocks in that country, Pershing Square which invests in select mostly US large caps including a new position in, ahem, Berkshire Hathaway, and Tetragon Financial which has a broad and diverse portfolio with a leaning towards real asset lending and secured debt.

All three have returned steady and appreciable growth since the end of 2018 ... was that the worst of fears about global growth and trade wars, or the switch in sentiment from rising to falling interest rates?

AVI typically runs at a 10% discount reflecting its risk, and invests in objects which also trade on a discount to book. Nested "cheap".

Since early 2016 if you pick the right trough and peak it has returned 50%, in the previous 10 years it was almost flat with jagged trace. I bought in early 2017 at 650p when the discount looked particularly wide and again in late 2018 at 710p during the most recent trough (jumped the gun it sank even lower than I expected).

Momentum in underlying stocks is currently encouraging but sensitive to macro-market worries. How can you value its outlook when it all depends on the strategy and outlook of the constituent holdings which themselves are a moving feast ... well you might just have to trust the management. Been around a long time, but what value do you attach to a brand these days? You would have to look in more detail at how it is shifitng its portfolio to understand how well prepared it is for what lies ahead.

On balance I would say it is a buy ... was a buy in December-January under 700p, when it looked good value.

Had you bought in August 1999 you would have made 193% over the following 10 years. That compares with a paltry 32% from one of the current stars, Scottish Mortgage. I have no idea whether AVI and Scottish Mortgage were invested in the same style and with the same managers as now during that period though. I have actually just rejected AVI on the grounds that it invests too much in high charging hedge funds. Plenty of value for sure with some hefty discounts to NAV on its holdings, but hedge fund managers have a unrivaled knack of pocketing most of the gains they make in one way or another, whilst continuing to charge hefty fees when they lose their investors' money.

The other 2 are much more conventional and contain the sort of portfolios I would expect to see value investors hold, including deeply unpopular stocks such as BT and Tesco. EP contains ING though which makes me question the fund managers judgement as that is a stock I would not touch with a bargepole. Still, no denying it falls into deep value territory. Scottish IT on the other hand have rather annoyingly changed their dividend policy recently to pay out far more. I suspect that is enough to get them switched into the Global Equity Income classification soon, where their performance record will not look anywhere near as bad as it currently does when compared to other ITs in the Global sector. I think I might actually have to look at the Global Equity Income stocks next, even though I would prefer to avoid high yielders. Flexible Investment might be another good place to look as it appears to contain quite a few dogs, relatively speaking.

[hiriskpaul]

I cannot understand what you are so upset about. I thought it interesting how 2 global ITs following distinct investment strategies could so dramatically reverse fortunes over 2 consecutive 10 year periods. That is all. I certainly did not infer from this that one was in some way better than the other and cannot imagine what prejudice you are on about.

No-one is forcing you to read this thread. If you get nothing from it, so be it. I really could not care less. I will not be responding to you again as I have no time for people who behave like mindless trolls.

[AsleepInYorkshire]

Interesting that Value does not necessarily mean investing in income. Investing in shareholder returns perhaps, or ...?

I have always struggled to understand what Value means ... "cheap" if the yield is modest?

Value in my mind is associated with mature companies who are no longer reinvesting all profits in the pure pursuit of growth they might be paying down debt, buying back shares or increasing dividends. A bit like Microsoft maybe, except MSFT is typically at the top of most Growth portfolios because of its strategy and momentum. But not Amazon then what about Apple ...?

Or are Value stocks like consumer conglomerates and drug companies with big brands who are exploiting the return from their investment? So a Unilever, Diageo, GSK ... where would you put a stock like Whitbread or Sainsbury or Next, assuming they were sound investments?

Can you elaborate or give examples of Value stock picks so we can understand the practical of what is meant by Value. Or should we just look up the collective investment top holdings and see what they think it means?

Not everyone wants to buy a basket without understanding what is in it, I sure don't, so even if you buy collective investments you want to know their top 10 or 25 holdings and their investment criteria.

PYAD - Profit, Yield, Assets, Debt.

A pure value investment would have robust profit, strong yield, plenty of assets and no debt (even surplus cash).

In reality it is may be no more than a carcass with some odd bits of meat that the other vultures can't see. And they belong to you.

Pure Value Investors usually have timelines for their chosen stocks to perform over as they believe that cash is safer than investment. Value investing is quite cyclical and may value investors can spend years in cash before they invest.

Can you elaborate or give examples of Value stock picks so we can understand the practical of what is meant by Value. Or should we just look up the collective investment top holdings and see what they think it means?

May I suggest you dive into the subject headlong and put forward your thoughts. You will get an answer. Value investors are bottom feeders. They look for bad news. For as much as the market can push a stock up without cause it can do the same at the other end. It can push a price down. But the value remains and will out eventually.

Best example I can give is I bought Dart in the early 00's. Why? Well fuel prices were going up big time and the airlines were being hit with larger costs. The "price" of these stocks fell. Which included the (then) very small airline Dart (Jet2.Com). I read Dart's results and they informed me that they had hedged their fuel prices. Bingo. I bought Dart and six months later I tidied up and sold them. That was an easy kill. One small nugget of information. That's all it takes. Value investors are bottom feeders looking for the value that remains after a price reduction. The value of a stock is not necessarily the price of a stock. In a simple way it's a buy low sell high strategy.

I've simplified as it helps to outline.

AiY

[AsleepInYorkshire]

Well that is self-fulfilling garbage of the sort which creates bias in people who ascribe value to what they feel like. In 1998 you could buy SMT for about 70p. It was dented hard by the 2008 crash and struggled back to the 90p range in 2009. It is now 500p+ a terrific growth success story since then. AGT was priced around 100p in 1998, grew to about 400p in 2009 and is now trading at around 750p. Pedestrian, especially when most of that improvement came in the last three or four years.

Easy tiger ... I am not a value investor ... but I know roughly how it works and from time to time I will adopt it .. especially if it's got some upside.

So ... does that make SMT a better growth pick or AGT a better value pick. No. Neither. You are just picking dates and ranges to find something which confirms your prejudice.

It's not prejudice. It's a shared belief. Read Benjamin Graham. He was Warren Buffett's mentor.

It certainly does not demonstrate either stock is better value, nor that there is better value in something because you prefer it to something else on intrinsic value assessment. Actually if anything this proves that finding a good stock ... whatever you call it ... is all about timing and recognising something is cheap.

Value actually does embrace timing yes. Because if all the PYAD's coalesce they will give a buy signal. After that as the buy signals fade way they actually become sell signals.

Reject AGT now because you missed the boat 9 months ago, not because it was a bad choice. I am sure there are better choices now. But you can't be sure. This is becoming a bit pathetic. Just pick whatever you are going to pick and tell us afterwards. Or don't. It makes no difference. Not learning anything from calling this a value strategy.

I'm sorry but this is inflammatory. I'm not usually as blunt. In my extremely humble opinion value investing is extreme and can be difficult to digest but it has it's place. Can I respectfully suggest you at the least you review your comments please? Thank you

Like I said, you don't know, I don't know, so put your chips down with someone who might just know. SMT and AGT and Buffett characteristically pass that test. Or if none of them appeal go to the capital preservation trusts like PNL, CGT, RICA, RIT.

I suspect that Buffett left value investing in the late 60's and looked at a different route of investment. Albeit I really couldn't give it a name. At best I'd call it growth, but am confident that doesn't capture what he's been up to

And ... worst of all ... let us stop criticising picks on historic performance, it is future returns which matter.

I'll take the fifth on this comment if I may please. Sometimes we do learn, sometimes we don't. Buffett has made many mistakes. He's human.

AiY

[Alaric]

For as much as the market can push a stock up without cause it can do the same at the other end. It can push a price down. But the value remains and will out eventually.

Some of the time that's going to pick up the same stocks the high yield people may be interested in. A price collapse plus maintenance of dividend can result in a dividend yield above average. Not always of course. A share with a dividend yield of 1% jumps to a dividend yield of 2% if the price halves. It's where the dividend yield was 4% and jumps to 8% because of the price halving that screening for high dividend yield will identify.

[OhNoNotimAgain]

The Ben Graham definition of value was price to book but the utility of that measure has been eroded by two factors:

The devaluation of the currency since the move to fiat money in 1971 has helped companies with hard assets like property as hedges against inflation.
The increasing importance of companies selling Intellectual Property, ideas rather than stuff that you can drop on your foot which makers P/B meaningless.

Price to earnings ratios are unreliable now that executives chase and manipulate earnings to boost their pay packages

Price to revenue cannot be used between sectors in a meaningful way, sales for a retailer are not the same as sales for a bank or insurance companies.

That leaves dividends as the least worst measure of value.

But unless a strategy encompasses the whole market it leaves it vulnerable to the stock specific risk of not owning something that actually does very well.

What you want is a strategy that captures the risk of the whole market, the systematic risk of Modern Portfolio Theory, but minimises the stock specific risk by holding everything; and then tilting the whole lot to value.

[simoan]

The Ben Graham definition of value was price to book but the utility of that measure has been eroded by two factors:

The devaluation of the currency since the move to fiat money in 1971 has helped companies with hard assets like property as hedges against inflation.
The increasing importance of companies selling Intellectual Property, ideas rather than stuff that you can drop on your foot which makers P/B meaningless.

Price to earnings ratios are unreliable now that executives chase and manipulate earnings to boost their pay packages

Price to revenue cannot be used between sectors in a meaningful way, sales for a retailer are not the same as sales for a bank or insurance companies.

That leaves dividends as the least worst measure of value.

But unless a strategy encompasses the whole market it leaves it vulnerable to the stock specific risk of not owning something that actually does very well.

What you want is a strategy that captures the risk of the whole market, the systematic risk of Modern Portfolio Theory, but minimises the stock specific risk by holding everything; and then tilting the whole lot to value.

I have to say, these are all excellent points. I meant to make similar arguments on another recent thread about value vs growth investing. IMO old-style value investing based on published P/E and P/B is pretty much dead due to modern accounting standards that allow all kinds of adjustments to profit and capitalisation of dubious intangible assets. Even using Price to Tangible Book needs great care unless the tangible assets are cash - look at the way REITs have been marking down the asset values of their retail properties, for instance, or how assets end up not being worth anywhere close to their book value in the case of a fire sale caused by financial distress - surely we at least learnt this from the financial crisis?

If you want a truer measure of value then IMHO it's cash generation although this will likely be negative at some point for a good value share. Book value and earnings can be easily manipulated by managements trying to paint a better picture than reality, and are just a matter of accounting opinion; cashflow cannot be so easily faked barring a total fraud like Pat Val. Ultimately, it is free cashflow from which dividends are derived and the ability of a company to cover dividend payments from free cash over a historic 5 year period is something I look at closely in terms of value. Particularly as income becomes more important to me as I get older.

All the best, Si

[hiriskpaul]

It is totally untrue to say that the Ben Graham definition of value was price to book. He uses intrinsic value, not book value. Intrinsic value includes the value of assets and other information, including dividends. I suggest you read Graham's book as well

It is true to say that Fama/French used p/b as a proxy for value in their work. For various reasons it would have been completely impractical to use intrinsic value.

Now you may argue that there are faults with solely using p/b and I would agree, but solely relying on dividends is also faulty. Simple example - how does this approach value Berkshire Hathaway or Amazon?

I don't know what the best modern approach to value investing is, but I am sure that focusing entirely on a single attribute is not it.

[simoan]

It is totally untrue to say that the Ben Graham definition of value was price to book. He uses intrinsic value, not book value. Intrinsic value includes the value of assets and other information, including dividends. I suggest you read Graham's book as well

FWIW In response to the previous thread where we discussed growth & value, I went away and ran all of the Ben Graham screens on Stockopedia. The companies produced by these filters were mostly awful, and you'd have to be a massive contrarian to buy into any of them. I consider myself contrarian by nature but most of the companies were total "bargepole territory" for me. As for filtering on low P/B, as you can imagine it mainly resulted in a list of house builders and insurance companies. Each to their own...

All the best, Si

[AsleepInYorkshire]

It is totally untrue to say that the Ben Graham definition of value was price to book. He uses intrinsic value, not book value. Intrinsic value includes the value of assets and other information, including dividends. I suggest you read Graham's book as well

It is true to say that Fama/French used p/b as a proxy for value in their work. For various reasons it would have been completely impractical to use intrinsic value.

Now you may argue that there are faults with solely using p/b and I would agree, but solely relying on dividends is also faulty. Simple example - how does this approach value Berkshire Hathaway or Amazon?

I don't know what the best modern approach to value investing is, but I am sure that focusing entirely on a single attribute is not it.

Albeit my knowledge of VI is "adequate" I'm not a disciple. I prefer to keep it simple and look at the PYAD. I don't like debt but would tolerate a small amount - I read debt as "large risk". I too look at dividends quite cynically. They can often be inflated deliberately to encourage yield reliant investors to buy. Nothing like a bit of nectar to raise the demand from the local bee population. My current strategy is to look for EPS growth (without buybacks and exceptionals) and to look for news which signals future growth in that EPS ... inflationary growth aside.

What I can say without any fear of contradiction is I have probably set my own bars too high. Everything currently looks slightly high on price.

I think the recent buy out of Green King may have been a p/b play?

However, refocusing on the conversation and reiterating I am not a disciple of VI but I often sniff around bad news in case there's some simple price suppression and a route for that to out within 12-24 months.

AiY

[hiriskpaul]

It is totally untrue to say that the Ben Graham definition of value was price to book. He uses intrinsic value, not book value. Intrinsic value includes the value of assets and other information, including dividends. I suggest you read Graham's book as well

FWIW In response to the previous thread where we discussed growth & value, I went away and ran all of the Ben Graham screens on Stockopedia. The companies produced by these filters were mostly awful, and you'd have to be a massive contrarian to buy into any of them. I consider myself contrarian by nature but most of the companies were total "bargepole territory" for me. As for filtering on low P/B, as you can imagine it mainly resulted in a list of house builders and insurance companies. Each to their own...

All the best, Si

Yes, bargepole to you and bargepole to lots of other people. If that was not the case, the shares would not be cheap and would not show up in your screens!

The point of value investing (as originally defined by Graham) is to ask the question are some of these companies too cheap?

I have made very good returns on securities that are in bargepole territory and I continue to look for them.

[AsleepInYorkshire]

It is totally untrue to say that the Ben Graham definition of value was price to book. He uses intrinsic value, not book value. Intrinsic value includes the value of assets and other information, including dividends. I suggest you read Graham's book as well

FWIW In response to the previous thread where we discussed growth & value, I went away and ran all of the Ben Graham screens on Stockopedia. The companies produced by these filters were mostly awful, and you'd have to be a massive contrarian to buy into any of them. I consider myself contrarian by nature but most of the companies were total "bargepole territory" for me. As for filtering on low P/B, as you can imagine it mainly resulted in a list of house builders and insurance companies. Each to their own...

All the best, Si

Yes, bargepole to you and bargepole to lots of other people. If that was not the case, the shares would not be cheap and would not show up in your screens!

The point of value investing (as originally defined by Graham) is to ask the question are some of these companies too cheap?

I have made very good returns on securities that are in bargepole territory and I continue to look for them.

It should be noted that true Value Investors do not buy and hold. They are looking to buy cheap and sell when the price recovers. They will often set timelines in place which are reasonably short. I recall that Stephen Bland used to suggest that if the stock had a dividend then this "could" be viewed as "compensation" for holding whilst waiting for the value to out and the price to rise. Again this is a very simplified way of describing part of a much more detailed analysis and I am not suggesting this would be the sole reason to buy a stock.

AiY

[hiriskpaul]

FWIW In response to the previous thread where we discussed growth & value, I went away and ran all of the Ben Graham screens on Stockopedia. The companies produced by these filters were mostly awful, and you'd have to be a massive contrarian to buy into any of them. I consider myself contrarian by nature but most of the companies were total "bargepole territory" for me. As for filtering on low P/B, as you can imagine it mainly resulted in a list of house builders and insurance companies. Each to their own...

All the best, Si

Yes, bargepole to you and bargepole to lots of other people. If that was not the case, the shares would not be cheap and would not show up in your screens!

The point of value investing (as originally defined by Graham) is to ask the question are some of these companies too cheap?

I have made very good returns on securities that are in bargepole territory and I continue to look for them.

It should be noted that true Value Investors do not buy and hold. They are looking to buy cheap and sell when the price recovers. They will often set timelines in place which are reasonably short. I recall that Stephen Bland used to suggest that if the stock had a dividend then this "could" be viewed as "compensation" for holding whilst waiting for the value to out and the price to rise. Again this is a very simplified way of describing part of a much more detailed analysis and I am not suggesting this would be the sole reason to buy a stock.

AiY

Different people have built on and use Graham's work in different ways, but Graham said you should intend to hold stocks for the long term. Having a holding period in mind would be tantamount to speculation, which he was dead against. However, if at some point an investment does rise above intrinsic value, you should sell.

Warren Buffett has said much the same thing. His favourite holding period is forever, but that does not necessarily mean you should hold forever. You sell when circumstances dictate.

[simoan]

Yes, bargepole to you and bargepole to lots of other people. If that was not the case, the shares would not be cheap and would not show up in your screens!

The point of value investing (as originally defined by Graham) is to ask the question are some of these companies too cheap?

I have made very good returns on securities that are in bargepole territory and I continue to look for them.

Yes, I understand this but there are some sectors I just don't want to be invested in and they are prevalent in the Graham filter results. Value investing should make you feel uncomfortable but there's a big difference between feeling slightly uneasy and not being able to sleep at night. We are largely talking about sectors which are highly cyclical, and for me, it's not the right time in the economic cycle to put money into housebuilders and related industries.

However, I recognise a real value investor would likely not take such factors into consideration. I am basically a value investor, but not so hardened that when the approach is clearly not working I'm going to bang my head against a wall for 10 years waiting for the value to out. The idea that you can time a switch from one strategy to another is just a form of market timing. People are rubbish at this kind of thing. Value shares can stay value shares for many, many years and growth shares can keep on growing longer than anyone expects. You also need to take into consideration the time value of money, so I'm happy to hold a mix of growth and value shares - how else do you explain someone holding Burberry and H&T in the same portfolio

FWIW I have been playing around with some value filters loosely based on Graham's principles, and it has produced a list of value shares that pass my smell test for further research. I thought I may as well share it (although I'm categorically not putting forward any of the companies themselves for comment here!):

Elementis
Volvere
Walker Greenbank
Somero Enterprises (already hold)
Titon Holidings
BP Marsh
Harworth
Henry Boot
James Latham
Vesuvius
ITV (already hold)
Hunting
Tyman
MJ Gleeson
TI Fluid Systems
Sylvania Platinum

All the best, Si

[AsleepInYorkshire]

Without wishing to come across as a clever git, may I ask how Gleeson got in there please?

Thank you

AiY