204 / 708
10
As I spelled out in the cover story, we know that inves-
tors tend to miss out on returns because of bad
timing. In investing literature, it’s also well documented
that there is a value premium. That is to say that
value stocks outperform growth stocks over the long
haul. Jason Hsu, of Rayliant Global Advisors, has
written about the link between these two things. Would
the value premium exist if investors didn’t sell stocks
or stock funds with declining performance? To
put it another way, Would value stocks become suffi-
ciently cheap to generate superior returns if you
didn’t have investors dumping them in recessions or
other times of stress?
In either case, Hsu found that fund investors squan-
dered the value premium by giving it back through
bad timing. But you don’t have to. I pulled together a
list of some of the deepest-value Morningstar
Medalists. To keep that value premium, though, you
need to hold on through thick and thin—barring
any fundamental problems like manager or strategy
change. I used the value-growth score, which is
what determines a fund’s spot in our Morningstar Style
Box. Scores range from negative
100
to
400
. A score
above
200
puts a fund in growth, and one below
100
puts it in value. The far left side of the style box is
drawn at the zero value-growth score, and the right
side is at a value-growth score of
300
.
Harbor Mid Cap Value
HIMVX
Value-Growth Score: Negative 4.12
Now that’s value. The fund, with a Morningstar
Analyst Rating of Bronze, maps all the way to the left
side of the style box. This is no accident. This is a
quantitatively run fund with deep academic roots that
aims to capture the value premium with deep-value
stocks. Subadvisor
LSV
Asset Management targets
companies with strong earnings and cash flows, but
whose shares are trading at steep discounts.
This deep-value strategy works nicely over the long
haul, but it takes on sizable risks to get there.
FPA Capital
FPPTX
Value-Growth Score: 7.2
This Bronze-rated fund is closed to new investors, so
I’ll be brief. Dennis Bryan and Arik Ahitov insist on
a huge
35%
discount to intrinsic value, thus limiting
themselves to the cheapest of the cheap. The fund’s
focus on cheapness led it to buy a lot of energy stocks
and hold a lot of cash. As a result, performance has
been dismal recently.
American Beacon Large Cap Value
AAGPX
Value-Growth Score: 20.3
American Beacon is a true believer in value investing,
but it diversifies stock risk by hiring multiple subadvisors
to do its stock selection. Thus, you’re going to get
less extreme performance than some of our other deep-
value choices. It farms out work to Hotchkis
&
Wiley,
Barrow Hanley, Brandywine (not the growth managers
who ran a fund by that name), and
MFS
. It’s a strong
group, but to be sure the fund will lag when deep value
is out of favor, as indicated by underperformance in
2008
and
2015
.
Vanguard Value
VVIAX
Value-Growth Score: 26.6
Yes, you get all the value stocks, more or less, with
this Silver-rated fund. The fund tracks the
CRSP
U.S. Large Cap Value Index. That index is based on
CRSP
’s version of value-growth scores, which
track short- and long-term earnings growth, sales
growth, return on assets, book/price, earnings/price,
dividend yield, and sales/price.
Vanguard High Dividend Yield Index
VHDYX
Value-Growth Score: 27
Would you like some income along with your
value premium? Then this Silver-rated fund is for you.
It follows the
FTSE
High Dividend Yield Index,
which screens for sizable yields and then weights
based on market cap. It boasts low costs and
appealing simplicity.
K
Recapturing the Value Premium
The Contrarian
|
Russel Kinnel
Our Contrarian Approach
I go against the grain to
find overlooked funds that may
be ready to rally.