With the value style of investment reaching the bottom of its cycle, money managers are broadening their efforts to find good companies that are undervalued by the rest of the market.
“A market correction will help to distinguish which valuations are overblown, and which are the truly good companies,” said Dylan Ball, Edinburgh-based executive vice president and portfolio manager for Franklin Templeton Investments' global equity group.
Money managers are looking in places they hadn't before for opportunities that might still be lingering, buoyed by the return of volatility to the energy markets, undersupply in the U.S. housing market, and a return to health by financials.
“I like the area that was the epicenter of the crisis in 2008, and that is the U.S. housing market,” said Mark Wynne-Jones, London-based portfolio manager of Investec Asset Management's global value equity strategy. “We have had two or three years of reasonable recovery in house prices, but we haven't seen a large pickup in house building. If I have to bet anything over the next five years or so, it is that the U.S. needs more housing.”
Ian Butler, portfolio manager for J.P. Morgan Asset Management's European strategic value strategy, in London, is more bullish on banks than he was this time last year. Banks passed the European Central Bank's Asset Quality Review last year, he said, and “post-AQR, we have purchased two or three new stocks in the portfolio.”
Emerging markets opportunities have been tough to come by, some said.
“We have had three to four years of economic slowdowns —just look at the BRICs,” said Laurence Bensafi, London-based deputy head, emerging markets equities, at RBC Global Asset Management, referring to Brazil, Russia, India and China. “Russia and Brazil are in recession, and China's GDP growth has been reducing every quarter. This environment of economic slowdown has been very difficult for emerging markets.”
These elements have combined to affect the cyclical investment style.
However, Ms. Bensafi said even as the value cycle approaches its bottom, opportunities remain.
“We have seen value and cheap names become (better) value, and cheaper and cheaper. But the difficulty is that there are a lot of value traps — companies seem cheap, but actually the outlook for that company is so poor that it is deserved.”
She is seeing value in energy and financial sectors.
Mr. Wynne-Jones is also seeing one pocket of value in the emerging markets. “The pain at the moment is (in) emerging markets and resources — although we are beginning to think that Korea is looking particularly cheap. And the oil countries ... look a contrarian, value place to be at the moment.”
