The first group are ‘deep value’ managers who have become more entrenched in their value bias almost irrespective of its structural challenges, for example increasing their exposure to areas like financials and energy.
The second group have shown style drift towards growth, which is generally commercially driven and evidenced in a high-level shift in the proportion of assets away from value funds and towards core and growth funds recently.
The final group remain with their core value philosophy but incrementally evolve their process to navigate the changing investment landscape. They look at valuation metrics as well as measures of business quality, such as balance sheet strength and free cash flow.
Given the headwinds faced by the style, we believe that effective manager selection is critical when allocating capital to value. We prefer allocating to this last group of ‘core value’ managers, due to their attractively discounted portfolios and importantly, the defensiveness they offer against the risks of the style while also capturing the value upside.
Blending value with other styles in a diversified portfolio offers a compelling strategic case for rewarding investors over the long term.
Oliver Jarman is an analyst at Fidelity International
