That’s the kind of come hither talk that pumps my assets, so I’ve scoured the fund universe for a way to get a piece of the action like a SETI telescope searching for intelligent life.
And lo, though I encountered plenty of slimy, betentacled hostiles, I’ve also made contact with more passive friendlies than I had previously believed possible.
The value premium for UK investors
These funds invest in companies tattooed with the mark of value. Their equities are either undervalued or perceived to be riddled with risk. Either way their price is depressed enough that juicy returns can follow if fortune smiles.
By selecting these funds for our portfolio, we’re essentially hoisting our sail to capture those value winds. But we do so in the knowledge that the wind blows fitfully. There can be long periods where we trail the market because the winds don’t come.
Oh yeah, and before we go on, we need to admit that value investing is an active strategy.
Value funds have to decide on the rules that govern which firms they will choose to buy from the pick ‘n’ mix of all available equities. Inevitably these rules require more interpretation, compared to a tracker that simply scoops equities according to their market cap.
But that’s okay, passive investing isn’t an excuse to turn your brain off and it does often require more active decision-making than is routinely acknowledged.
Moreover, you can buy value funds from firms operating according to clear methodologies grounded in academic research – as opposed to financial Wizard of Oz characters proclaiming their preternatural ability to beat the market.
Now I’ve chased away the lily-livered with my torturous preamble, let’s get down to it. UK investors have four flavours of value fund to choose from (not counting hooking up with an international broker to access the myriad options in the US).
1. Dividend weighted funds
Equities that pay out high dividends in comparison to their price have value characteristics. However, a high dividend to price (D/P) ratio is the weakest form of value and has historically been outperformed by other measures such as book to price (often known as book-to-market).
It’s also worth considering that the price of equity income and dividend funds has jumped over the last few years, as bond yields have plummeted and income hungry investors have turned to equities.
That’s likely to lower the returns of dividend trackers in the future. All the same, they must be included in any UK survey of value funds.
2. Fundamental funds
Trackers that follow fundamental indices invest in the broad market (e.g. the FTSE All-Share) but don’t weight their components by the traditional method of market cap.2
Instead, fundamental trackers select equities according to health indicators such as profits, sales, and book value.
By investing in a fundamental tracker, you buy into a broad market fund with a stronger value signal than usual, without the issues of turnover and excessive concentration that can afflict other value approaches. The PowerShares FTSE RAFI ETF series is the brand champion in this arena.
3. Value factor funds
Value trackers follow an index of equities that rank highly for one or more value factors such as earnings to price, cashflow to price, price to book, and dividends to price.
This is similar to the fundamental approach except that the value tracker is ‘value concentrate’ as opposed to ‘value flavoured’. In other words, it comprises equities that represent the value subset of the market, rather than the entire market weighted in favour of equities with value tendencies.
Then there’s Dimensional Fund Advisors (DFA).
Dimensional are a fund shop who specialise in value. Their funds are extensively used by passive luminaries such as William Bernstein, Larry Swedroe, and Rick Ferri.
However, DFA funds are not index funds. They use a single factor – high book-to-market (price) – to select their equities, but they don’t follow an index.
This enables the firm to trade advantageously, keep costs low, and offer the widest range of value funds available in the UK.
DFA funds are normally only available through IFAs. But I’ve found them through online broker Sippdeal.
The advertised £100,000 minimum investment is a bit rich but Sippdeal tell me that they accept orders of any size.
This is a massive boost for UK passive investors, if it’s actually true.
I’ve been burnt by brokerage staff talking through their hats before. This may yet prove to be a false dawn, but I’ll pursue it to the point of opening my own account and making a personal trade, and will report back on my success or otherwise soonest.
4. Active funds
The advent of clean class options means that a few actively managed funds, with a value remit, are relatively affordable now that the commission price puffery has been stripped out.
You can use MorningStar’s style box to help you track down likely candidates, although I’ve only found two that I’d trust to stay on style.
A value fund hitlist for UK passive investors
Lordy, have I finally got to the point?
Here’s my selection organised by asset class:
|Global Value Funds||Approach||Style3||OCF (%)4|
|Dimensional International Value Fund||Value factor||Large Value||0.57|
|PowerShares FTSE RAFI Dvlpd 1000 ETF||Fundamental||Large Value||0.5|
|PowerShares FTSE RAFI All-World 3000 ETF||Fundamental||Large Value||0.5|
|DBX Stoxx Global Select Dividend 100 ETF||Dividend||Large Value||0.5|
|Dimensional Global Targeted Value Fund||Value factor||Small Value||0.66|
|Dimensional Multi-Factor Equity Fund||Value factor||Mid Value||0.62|
- Note: Global usually means developed world.
- Although the All-World fund does include emerging markets.
- Only the DFA International Value fund excludes the UK.
- The DFA Multi-Factor fund is a 100% equity fund of funds.
|US Value Funds||Approach||Style||OCF (%)|
|UBS (Irl) ETF – MSCI USA Value I-dis||Value factor||Large Value||0.23|
|PowerShares FTSE RAFI US 1000 ETF||Fundamental||Large Value||0.39|
|SPDR S&P US Dividend Aristocrats ETF||Dividend||Large Value||0.35|
|Vanguard U.S. Fundamental Value Invr Inc||Active fund||Large Value||0.95|
- Strange but true – Vanguard dabbles with active fund management. Here it has sub-contracted to a deep value specialist, Pzena Investment Management.
|European Value Funds||Approach||Style||OCF (%)|
|Dimensional European Value Fund||Value factor||Large Value||0.57|
|PowerShares FTSE RAFI Europe ETF||Fundamental||Large Value||0.5|
|iShares EURO STOXX Ttl Mkt Value Large5||Value factor||Large Value||0.4|
|UBS-ETF MSCI EMU Value A||Value factor||Large Value||0.4|
- You can roll your own international value allocation out of the US and European options.
- Completists can add the Pacific Rim and Japan. I haven’t checked these out.
|UK Value Funds||Approach||Style||OCF (%)|
|Dimensional UK Value Fund||Value factor||Large Value||0.54|
|Dimensional UK Core Equity Fund||Value factor||Large Value||0.36|
|PowerShares FTSE RAFI UK 100 ETF||Fundamental||Large Value||0.5|
|Valu-Trac Munro UK Dividend Fund Class X||Dividend||Large Value||1.5|
|SPDR S&P UK Dividend Aristocrats ETF||Dividend||Large Value||0.62|
|Vanguard FTSE U.K. Equity Income Index||Dividend||Large Value||0.25|
|Aberforth UK Small Companies||Active fund||Small Value||0.85|
- The DFA UK Core fund is a broad market fund that tilts towards value.
- The DFA Value fund specialises in value equities.
- The Munro fund is a dividend focussed fundamental fund. i.e. It doesn’t select equities according to their market cap. Recently acquired by Maven Capital.
- The Aberforth Smaller Companies fund has a near identical (but slightly cheaper) investment trust twin.
|Emerging Markets Value Funds||Approach||Style||OCF (%)|
|Dimensional Emerging Markets Value Fund||Value factor||Large Value||0.72|
|PowerShares FTSE RAFI Emerging Mkts ETF6||Fundamental||Large Value||0.65|
|iShares DJ Emg Mkts Select Dividend ETF7||Dividend||Large Value||0.65|
|Dimensional Emerging Mkts Targeted Value8||Value factor||Mid Value||0.97|
All table data researched in April 2013.
Remember, a fundamental tracker takes the place of a broad-based market cap fund in your portfolio, and adds a value accent to that asset class.
If you choose any other value approach then keep your core funds but split off a percentage of that asset’s allocation for the value fund.
Take a look at Tim Hale’s Global Style Tilts portfolio or look up William Bernstein’s Four Corner’s portfolio for portfolio ideas.
Also bear in mind that there is no strict definition of value investing. Research your own choices to ensure you understand how they work. Different approaches will bear different fruit and we have no way of forecasting which will prove to be the juiciest.
Perfection is academic
And now, for my final off-putting caveat: No value fund will capture the full value premium as defined by the academics.
That would involve going long value equities and shorting growth equities, which as passive investors we have no truck with, especially as we’d only use it to run over our own feet.
So think of your value fund like a sardine net. You’ll catch some of the shoal but not the whole lot. Some days (or years) you won’t catch anything, but when you do it will make for a nice, tasty lunch.
Take it steady,
- According to research by Dimensional Fund Advisors.
- i.e. With the market cap method, if a company is worth 10% of the index then it makes up 10% of the tracker.
- As per MorningStar classifications
- Or TER. Learn more about the difference
- Full name: iShares EURO STOXX Total Market Value Large ETF
- Full name: PowerShares FTSE RAFI Emerging Markets ETF
- Full name: iShares Dow Jones Emerging Markets Select Dividend ETF
- Full name: Dimensional Emerging Markets Targeted Value Fund