Last week The Sunday Times asked for my opinion on the sectors with the best value opportunities at the moment and the best funds to give exposure to them. If you have a subscription to the Sunday Times here is a link so you can view the full article The reasons to love a stock that has fallen out of favour.
However, below I provide my full commentary, analysis and fund suggestions exclusively for 80-20 Investor members.
The sectors offering the best value opportunities
With the market still down more than 10% from last year’s high a number of sectors now look cheaper on a price to earnings (p/e) basis and will have shown up on value investors' radars. But value investing is not easy. The skill lies in trying to differentiate between something that is cheap in the short term for a reason, known as a ‘value trap’, and something which offers long term value.
Since the Autumn of 2014 value investing has lagged a growth style of investing but that's starting to change in recent months. In fact there are now some sectors now looking attractive from a value perspective.
Banking
This unloved sector is now offering value having taken a battering since the credit crisis. Since 2008 the sector has shrunk balance sheets and there's been some much needed market consolidation, although maybe not enough. The sector is offering some attractive p/e measures as well as yields with some banks beginning to pay decent dividends.
Having said that the sector is not without its headwinds. A world of low (or even negative) interest rates puts pressure on banks' margins, while some banks are having to postpone dividends (RBS) or even cut dividends. Also anyone holding bank stocks earlier this year would have been uncomfortable when concerns over another banking crisis caused markets to wobble. Like all value plays it’s about stock selection.
Those looking to gain exposure to this sector should look at Majedie UK Income (a regular in the 80-20 Investor Best of the Best Selection) which has around a 14% weighting to the banking sector including over a 5% exposure to Lloyds banking Group.
Oil
Another out of favour sector is the oil industry. The plummeting price of oil has had a negative impact not just on oil companies but equities generally. Yet while the shares of oil companies have suffered a number of analysts have now called a bottom to the oil price.
With capital expenditure being cut within the industry the hope is that this should start to impact production levels, reducing the oversupply that's hindered the sector. For those looking to start dipping their toe back into the market then buy a fund with a strategic exposure to the sector such as Fidelity Special Situations run by star manager Alex Wright.
Alex Wright has an excellent track record of finding value for investors and is a proven stock picker. His fund has around 10% exposure to oil companies.
Housebuilders
Housebuilders’ shares have largely underperformed the wider market this year and on a pure p/e ratio of around 8.5 they offer value not seen since 2011. The sector offers attractive yields (between 5% and 6%) and based on the p/e ratio alone offers greater value vs the overall market (FTSE 100 has a p/e ratio of around 17).
Yet this sector is a perfect example of how 'value' can be subjective. On other price measures such as the cyclically adjusted p/e (or CAPE) which smooths out the p/e ratio by looking at the earnings over 10 years, housebuilders are looking expensive versus history.
In fact some analysts are claiming the sector has the hallmarks of a value trap with future earnings coming under pressure from cost pressures and a house price correction. Throw in the likely fall in demand from buy-to-let landlords (after recent stamp duty and tax relief changes) and foreign investors (if there is a Brexit next month) then it is no surprise that there’s been some profit taking among investors, which is why the sector has now hit value investors screens.
If you want to gain exposure to the sector it’s not easy. The problem with property funds is that they are focussed on commercial property with limited exposure to the retail market. One way to get some exposure is through a broad fund - look at UK all companies funds with a mid cap focus. The shares of a number of house builders are in FTSE 250. Schroder UK Mid 250 has Bovis Homes and Redrow as two of it’s top 5 holdings totalling over 10% of the fund’s assets.
Other sectors
I also looked at a number of other sectors such as supermarkets and energy but remain unconvinced that the value is there. Supermarkets face headwinds from competition from heavy discount stores (Aldi etc) while energy stocks are prone to a macro based correction despite a recent bounce.
