Value strategies - practical

[simoan]

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

Thank you

AiY

Graham Deep Value Score > 7.

[AsleepInYorkshire]

Thanks and sorry if I have been too blunt, I intended to make a forceful criticism of what I consider to be amorphous verging on mumbo jumbo but not to cause offence. If you evangelise the idea then I can understand why you would take offence. Happy to apologise, I have learned plenty too so thanks to you and everyone else.

Since this is the practical topic for those interested in Value investing maybe it should be about proposing candidates and arguing whether they pass the intrinsic value test ... there is no right or wrong if intrinsic allows you to decide for yourselves what to conclude, but we might learn from each other with our valuations and criticisms?

For me AVI remains my one and only basket pick with value on the label. It definitely was cheap under 700p and maybe still be cheap if you think the discount to NAV and the embedded discounts to NAV in the holdings represent value. That is the full extent of my argument.

I think UK house builders and REITs are cheap, and therefore value right now ... most of them ... because the price does not respect the real assets being marked down. Those with low or no debt and a large diverse property portfolio or land bank and paying a high yield on low p/e in the 6 to 10 range are cheap, and despite all the gloom much of the housing sector has continued to operate on margins of 20% or even 30%. I chose RDI REIT and CRST because they seem determined to continue paying a well covered high yield and to adapt their strategy to maintain that. They are not popular though and as a result appear cheap even for the sector. But that is more gut instinct than a detailed intrinsic valuation analysis based on whatever methodology. Please tell me why I have picked wrong.

No doubt everyone has a choice which others would not touch with a bargepole.

The irony is they aren't. I always struggle to explain this. Please forgive me if I fail. Someone far more efficient will follow me with a much better explanation. House builders buy land to build upon. If the value of that lands falls they will take a hit. If a house builder own 10 plots that have cost £50K each and they fall in value by £10K each the house builder has lost £100K. And it's common for land prices to fall when house prices fall. So it's entirely possible the house builder could also lose on it's revenue. It may have anticipated selling 10 plots for £300K each. But can only achieve £275K each. So it takes another hit. It also cannot shed all it's employees, so it's overheads rise during this period. If I recall correctly low P/E's aren't considered value for house builders - high are. Again I've given a very simplistic answer.

The time to buy house builders is when no one is buying their product. And that, trust me, is an extremely dangerous bet.

AiY

[Alaric]

ITV also shows up on the HYP searches for high dividend yield.

[AsleepInYorkshire]

What is a cheap price-to-book ratio?

By my fingers and toes most builders have p/b 1.5 to 2. By book I am just counting average net cash and land assets. Not counting earnings or future earnings potential. Take BKG it has about 40,000 plots in hand valued at about £3B and maybe £600M net cash. Ignore that it has been making £750M pa profit or that it thinks there is the equivalent of £6B in future profit potential in its assets. Ignore its generous sounding shareholder return programme, these days a crummy dividend and a buyback programme. I shared the fears that it could take a 30% hit this year from the factors you mention but the hit turned out to only be 5% ... isn't that another characteristic, you are overplaying the fears. The idea that people would stop buying (its) houses was foremost ... wealthy overseas cash buyers lobbing £700K at 2-bed riverview boxes should have dried up. But future sales have not ... less buoyant yes, less frothy prices yes, shifting focus to less prime developments maybe.

CRST has less land bank maybe £1200M and carries about £350M net debt. It makes only £175M profit at 15% gross margin to BKG 30%. Grew sales in H1 though, and at a slightly higher price average albeit one it expects has peaked now for a while. Sustains an 8-9% yield at this price, and p/b nearer the 1.5 while BKG is at the p/b 2 end. It has refreshed management and aims to reduce costs, trim debt, manage cash to sustain the dividend cover. As far as I can tell it has not had issues like greedy exec pay, poor quality and customer service, unfair lease terms etc. None of this may amount to a Value assessment, or does it?

But they are cheap and CRST is one if the cheapest by those reasons. Isn't a typical p/b for a profitable stock about 4? OK so housing is different, but why so different?

And how is that not cheap ... you and most of the market are still looking at a near term major crash in house market / prices as a raging certainty ... but one which has been coming for 3 and a half years and is still coming ... or not. Taking a longer view ... we have about the highest employment rate since the 1970s property boom (despite that also being a decade of great economic and political turmoil), strong real wage growth, and an economy which has defied all the gloomy outlook. So far.

I do not understand the jab about ITV, it does not have real assets but it does have content which sells ads and er ... sorry dont understand the business or your message. We are not fixated on p/e or yield as the sole measures of cheap or value but they are sirens which tempt us (me) in. ITV does not interest me sorry.

BTW I was amused studying Buffett's portfolio today how he backs almost every US airline and most of the US banks, so he has no problem backing several players in a sector. And is not frightened to invest heavily in sectors which others say do not touch because they have jaws which can bite your hand off faster than you can pull it back.

I would be happy to discuss this further with you. Firstly I am not sure it would be a value conversation and I'd like to suggest the focus of the board is respected and perhaps this could be discussed on the shares idea board?

Secondly - I am well versed in how house builders make their margins. Indeed it's how I earn my living.

AiY

[Hariseldon58]

Back to the original question.

VVAL has a good mix of stocks, plenty of small companies ( take a look at the median market cap) plenty of the unloved. I bought VVAL initially at about £14 when launched, did well but has plateaued since. I’d be hopeful that it has upside.

I also hold UBS USA value (UC07) I appreciate its not global but since US is about 60% of the developed markets it’s useful. I also hold VHYL Global HI Yield and WQDS Global Quality Hi Yield. Now the VVAL portfolio is very different to UC07, WQDS and VHYL. But UC07 a value index tracker has a very similar portfolio to the US stocks held by both the Hi Yield and Quality Hi Yield Index ETFs.

So Yield may not equate to value but it’s a close relation, it’s been fairly unloved of recent years, it’s day in the sun may come round again...

Before one dismisses the global Hi Yield stocks as value traps etc, the market makes a reasonable job of pricing every stock, it then overlays that with a measure of its popularity. Hi Yield, particularly UK stocks did wonderfully well for me from the early 99’s through to around 2010 when they didn’t and I followed other routes. I tend to think Value and Yield may do ok in the next 2 - 4 years and are not very popular...

[hiriskpaul]

Back to the original question.

VVAL has a good mix of stocks, plenty of small companies ( take a look at the median market cap) plenty of the unloved. I bought VVAL initially at about £14 when launched, did well but has plateaued since. I’d be hopeful that it has upside.

I also hold UBS USA value (UC07) I appreciate its not global but since US is about 60% of the developed markets it’s useful. I also hold VHYL Global HI Yield and WQDS Global Quality Hi Yield. Now the VVAL portfolio is very different to UC07, WQDS and VHYL. But UC07 a value index tracker has a very similar portfolio to the US stocks held by both the Hi Yield and Quality Hi Yield Index ETFs.

So Yield may not equate to value but it’s a close relation, it’s been fairly unloved of recent years, it’s day in the sun may come round again...

Before one dismisses the global Hi Yield stocks as value traps etc, the market makes a reasonable job of pricing every stock, it then overlays that with a measure of its popularity. Hi Yield, particularly UK stocks did wonderfully well for me from the early 99’s through to around 2010 when they didn’t and I followed other routes. I tend to think Value and Yield may do ok in the next 2 - 4 years and are not very popular...

Thanks for the suggestions, I will take a look. I don’t really want a US only value investment at the moment though as I already hold Vanguard's US listed small cap value ETF, VBR. So I would prefer non-US value!

As you say, high yield might be an appropriate way in and has lagged as well. One of the disadvantages though is high income leads to higher tax. I started to look at some of the global income ITs. Despite recent relatively poor performance, discounts are not significant, so equity income still seems fairly popular. The other issue is that they tend to want to maximise income, eg by taking charges from capital. Fine if you want income, a tax inefficient pain if you don't.

[Sobraon]

.... I already hold Vanguard's US listed small cap value ETF, VBR. ....

Can you still buy this ETF in the UK? If so, how please?

[hiriskpaul]

.... I already hold Vanguard's US listed small cap value ETF, VBR. ....

Can you still buy this ETF in the UK? If so, how please?

It is difficult. I hold it at Hargreaves Lansdown, but they will not allow me to purchase any more US listed ETFs. The only broker that allows me to buy US listed ETFs is IG and that is only because I am classified as a professional investor with them.

[Degsy67]

Back to the original question.

VVAL has a good mix of stocks, plenty of small companies ( take a look at the median market cap) plenty of the unloved. I bought VVAL initially at about £14 when launched, did well but has plateaued since. I’d be hopeful that it has upside.

Having run a HYP portfolio for a number of years, which is effectively a value strategy focusing on income generation, I have moved over time to a globally diversified passive strategy using low cost ETFs. As part of a recent portfolio rebalancing and further simplification step, which saw me exiting a number of legacy portfolio ITs, I was looking for exposure to global value equities. I’m broadly following the concepts outlined in Tim Hale’s Smarter Investing which also recommends a tilt in favour of value as well as small cap. The 3rd edition of his book highlights Dimensional International Value Fund as an option (not a recommendation) to implement a value tilt in a passive portfolio. This book was published in October 2013 so it’s frozen in time now compared to newer ETF products launched after this point.

I also selected Vanguard’s Global Value Factor ETF (VVAL) to implement part of the value tilt for my portfolio with an OCF of 0.22% and global diversification across 1,200+ holdings. You do however need to be mindful of geographic drift as VVAL is 64% North America. VVAL was launched in December 2015 so it post dates Tim Hale’s 3rd edition by a couple of years. Time for a 4th edition Tim!

As a minor nod towards my old HYP investing days, and to help address US portfolio bias and exchange rate risk, I also hold a reasonable chunk in Wisdom Tree UK Equity Income (WUCK) with an OCF of 0.29%. I consider this to provide a domestic market value tilt from a portfolio management perspective. It is diversified across 100 UK holdings with Persimmon currently as its 4th largest holding at 3.5%.

My largest holding for the value tilt however is Vanguard FTSE All-World High Dividend Yield (VHYL), working on the basis that high dividend yield is a reasonable proxy for value (yes, I know they are not the same however there is a large overlap between value and high yield so I’m not going to split hairs). VHYL has an OCF of 0.29% which is a little higher than VVAL at 0.22% however VYHL is diversified across more holdings at almost 1,500 and is more globally diversified with a lower 43% exposure to North America.

Selecting a global value fund has a tendency to push your portfolio more towards large cap and mid cap holdings. The holdings in VVAL have a median market cap of USD 6.7bn which isn’t too bad (cf. USD 54.8bn for VHYL) with the largest holding being Ford Motor Company at a market cap of USD 34.8bn so no small fry! To help address this I hold iShares MSCI World Small Cap (WLDS). This is diversified across over 3,200 holdings with the average market cap being around USD 2.6bn.

It’s also worth noting when considering VVAL that it accumulates dividends rather than paying them out. VHYL by comparison currently has a yield around 3.6% and pays out quarterly. Better income than you can get from HMWO at around 2% and better than a savings account (assuming you are happy with equity risk exposure and volatility of the capital value).

Degsy

[Hariseldon58]

@degsy

Likewise VVAL VHYL WLDS and also WQDS & UC07 for value/income/small tilts.

I am now very wary of small ETFs having had a UK Equity Income ETF shut up shop not long after I bought it this summer. I opted to let it close and accept liquidation proceeds ( the manager paid for the liquidation) but I was out of the market for quite a while...

I tend to avoid any ETF with a market cap under £50m

The FTSE has a high yield, not expensive..

WUKD is around £7m...