Buy it cheap
He said: “The way you make money is to buy cheap stuff that does not reflect its prospects. Whether it is at a high multiple and going to go through the roof, or on a low multiple and doing just slightly better, if you bought it for less than it was worth, you bought value.”
The difficulty in the current environment is finding things that are cheap.
Jonathan Lau, investment analyst at Anderson Strathern asset management, said: “If you are looking at equities in general, PE multiples versus the past 10 years do seem quite rich.”
All five managers agreed that quantitative easing, increased volatility and disruptive technology had all significantly complicated valuation.
Horsfield said part of the reason why value had underperformed was that discount rates had squeezed out so far. “How do you value something when interest rates are negative?”
One example was the banking sector, which he said was in need of higher interest rates and a touch of inflation to get it to start working properly.
He did not expect either any time soon, particularly in Europe, which begged the question: “Do you invest in the sector because it is cheap and there are catalysts on the distant horizon, or do you actually need these catalysts before you start investing there? I do not know.”
Herberts said there was still value in the UK and overseas but managers had to go to individual stocks to find it. “There are definitely stocks out there with good growth prospects. There are areas of the market that are showing value but when stocks are missing expectations or giving soft guidance, they are getting absolutely thrashed.
“That is providing stockpickers with opportunity but it does make it harder to buy things at a sector level, for example,” he said.
Fixed income also remained a concern for Herberts. “The toughest part of the market at the moment is figuring out what to do with your fixed income allocations.”
Mark Ivory, executive director research at Adam & Company, agreed, adding that part of the quandary was working out what to do with one’s fixed income allocation. He said he viewed fixed income as a diversifier but it did not help that it was so expensive.
“Our client base is largely sterling-based investors, so they have to have a certain exposure. One can say it is an expensive asset class, but it keeps going up. You have to keep sticking to your guns though because it makes no sense to buy something at its all-time peak.
“There is a natural place in that ‘fixed part’ to go into macro bond funds, so we have done a little of that. But we have never really bought into hedge funds or structured products because the returns from a hedge fund compared with a typical equity portfolio or even a balanced one are miles behind. There are some hedge funds that do brilliantly well, but we have just avoided it.
“But because bonds are so expensive, you find yourself looking for something that is going to give you fixed-like returns, which is difficult if you are ruling out structured products,” he said.
