January 2020, Dermot Murphy
Dermot Murphy looks back on another tough year for Value investors. But could things be approaching a turning point? Dermot examines the extreme level of valuation spread in the market and the low valuations now on offer, which make Jupiter’s Value Equities team more positive on the outlook for Value than they have been for some time.
Key points:
- 2019 was a difficult year for Value investing, as well as for Jupiter’s UK Value strategy.
- Value as a style is at a generation low relative to growth. In fact it is the cheapest it has been for 30 years. Unless value investing is “broken”, history suggests this could be a good starting point for investing in Value stocks.
- Despite the extremely challenging environment for our investment style, the returns for the funds in Jupiter UK Value strategy over 5 years have been resilient.
The FTSE All-Share Index rose by 19.2% in 2019. However, the headline number doesn’t quite convey the different underlying movements within the Index. The FTSE 100 Index returned 17.2%, with the mid-cap FTSE 250 Index significantly outperforming at 28.9%. That performance was heavily skewed towards the end of the year as the environment for UK equities improved following the clear result in the general election. This sent the FTSE 250 Index, which is dominated by UK domestic companies, up further. Added to this, in the fourth quarter of the year sterling was also up 8% against the US dollar, further helping UK domestic companies.
The environment continued to be challenging for Value investors. The below chart shows the valuation spread between the cheapest and most expensive quintiles since 1990. The data shows that markets are currently in the first percentile of valuation spread, meaning that the spread between growth and value has never been wider since 1990.
Although it has been a very challenging environment for Value investors like us up to this point, we are optimistic that if history is to be believed, the data points to this being an extreme position and a decent entry point for investing in Value stocks.
By some measures, the valuation spread between Value and Growth stocks is more extreme than the dot.com bubble
Source: UBS European Equity Strategy, UBS Quant Group. NB: P/Book spread between top and bottom tercile of stocks ranked by a Value composite measure of P/Book,
PE and Dividend Yield. This is measured sector-neutral. As at 31.05.19.
Regarding the Jupiter UK Value strategy specifically, 2019 was the third worst year for the Jupiter UK Special Situations Fund from a relative point of view. The fund underperformed the FTSE All Share by -2.8%, only surpassed in 2009 and 2017. With 2 of the 3 worst years happening in the last 3 years, it highlights how difficult recent performance has been and how our style has been a significant headwind to relative returns.
Past performance is no guide to the future. Source: FE, Jupiter UK Special Situations Fund I Acc, in GBP. Numbers may not add up due to rounding. Relative performance uses net of fees returns against FTSE All-Share Index. *Fund performance data is calculated on a NAV to NAV or bid to NAV basis dependent on the period of reporting, all performance is net of fees with income reinvested.
For the Jupiter Income Trust, 2019 was the worst relative performance year since the current fund manager, Ben Whitmore, took over managing the fund in 2013. The fund returned 12.7% (-6.5% relative underperformance).
One gauge we look at to highlight how Value investing has performed in the abstract is our Graham & Dodd screen. This takes the most lowly valued 30 companies in the UK at the start of the year and tracks their performance without rebalancing them for 12 months. It helps us to see how the style has performed.
The below chart highlights those returns over the first and second half of the year. In the first six months of 2019 the Graham & Dodd screen underperformed the FTSE All-Share Index by 11%. However, in the second half of the year there was a very big reversion: the screen rose over 17%, with the market rising just over 5%.
A year of two halves
Past performance is no guide to the future. Source: FE, Jupiter UK Special Situations Fund I Acc and Jupiter Income Trust Fund I Acc, in GBP. Fund performance data is calculated on a NAV to NAV or bid to NAV basis dependent on the period of reporting; all performance is net of fees with income reinvested. Graham & Dodd screen returns are Jupiter analysis.
Whilst the environment for value has been challenging, the UK value funds are now trading on a Graham % Dodd price/earnings ratio of 11.1x (Jupiter UK Special Situations) and 9.8x (Jupiter Income Trust), which is very lowly valued. The stocks held within each fund’s respective portfolios have high returns on operating assets (measure of quality); 28.7% and 27.5% respectively. The combination of these characteristics, along with the valuation spread mentioned above, make us more positive about the future returns of Value than we have been for some time.
Fund risk information
For both the Jupiter Income Trust and Jupiter UK Special Situations Fund, the Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. All of the Jupiter Income Trust's expenses are charged to capital, which can reduce the potential for capital growth.
This document is intended for investment professionals and is not for the use or benefit of other persons, including retail investors. This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. Past performance is no guide to the future. The views expressed are those of the Fund Manager(s) at the time of writing, are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Holding examples are not a recommendation to buy or sell. Quoted yields are not guaranteed and may change in the future. Issued by Jupiter Unit Trust Managers Limited (JUTM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ which is authorised and regulated by the Financial Conduct Authority. No part of this document may be reproduced in any manner without the prior permission of JUTM.
This document contains information based on the FTSE All-Share Index, the FTSE 100 Index and the FTSE 250 Index. ‘FTSE®’ is a trade mark owned by the London Stock Exchange Plc and is used by FTSE International Limited (‘FTSE’) under licence. The FTSE All-Share Index, the FTSE 100 Index and the FTSE 250 Index are calculated by FTSE. FTSE does not sponsor, endorse or promote the product referred to in this document and is not in any way connected to it and does not accept any liability in relation to its issue, operation and trading. All copyright and database rights in the index values and constituent list vest in FTSE. 25008
