Have value funds led the pack since vaccine breakthroughs?
We crunch the numbers to see how UK funds with a value or recovery focus have fared since last November. There have been numerous predictions over the years of a resurgence for value investing and plenty of false starts, but following the vaccine breakthroughs towards the end of last year, the tide has turned. The positive vaccine progress has led to a pick-up in global economic growth expectations. Alongside this, the prospect of rising inflation has prompted plenty of column inches on the reflation trade. In theory, this is a favourable backdrop for value stocks that are more cyclical and economically sensitive, such as retailers, oil companies, airlines and house-builders. So far this has played out. Since the start of November the MSCI World Value Index has returned 27.4% versus 19.8% for the MSCI Growth Index, figures from FE Analytics show. Funds and investment trusts with have a value focus have benefited from this tailwind, particularly those that invest in UK shares, as the market has a bias towards cyclical companies. Research by interactive investor using FE Analytics found that while the average fund in the Investment Associations UK all companies sector had returned 34.1% from 1 November 2020 to 24 June 2021, funds that overtly have a value focus  which for this article we define as those with the words value or recovery in their names  have, in most cases, outperformed the sector average. In total, 10 out of 11 such funds have outperformed the sector average since 1 November. The six funds with value in their names all outperformed the average. Premier Miton UK Value Opportunities led the pack, with returns of 52.6%, followed by Dimensional UK Value and Schroder Responsible Value UK Equity with returns of 52.3% and 50.1%. JPM UK Equity Value, was up 48%, followed by Man GLG Undervalued Assets and Polar Capital UK Value Opportunities, with returns of 46% and 41.3%. For funds with recovery in their name, four of the five outperformed. Schroder Recovery was the best performer, with a return of 54.7%. R&M UK Recovery was closely behind, up 51.7%, followed by Slater Recovery and M&G Recovery, with gains of 42.8% and 40.4%. The only fund slightly behind the sector average is MI Brompton UK Recovery Unit Trust, up 33.3%. There are, of course, other funds investing in value shares that have fared well, but they do not have value or recovery in their names, so are therefore harder to identify at the outset. Some are dubbed special situations, but not all such funds have a value focus. Instead, some special situation funds, which tend to focus on hidden gems in the mid and small-cap part of the market, have a quality growth focus. However, two funds that do hunt for bargains and have subsequently fared well during the value rally are Crux UK Special Situations and Ninety One UK Special Situations, which are both up 54%. As ever, it is vital to look under the bonnet to find out how the fund manager invests by studying its fund factsheet, which is a two or three-page document giving a quick overview of a funds performance. It will also explain where the fund is currently investing, the top 10 holdings and other key information. Over the period, the best performer was VT Cape Wrath Focus, which has a value strategy. The fund is up 69%. The same trend has played out for investment trusts. Of the nine trusts in the Association of Investment Companies (AIC) UK all companies sector, the top performer since 1 November is Fidelity Special Values (LSE:FSV), which is up 71.6%. The trust invests in value shares and has been adding to banks over recent months on the grounds that compared to other cyclical shares the sector still looks good value. In the AIC UK equity income sector, two of the best performers have been Merchants (LSE:MRCH) and Temple Bar (LSE:TMPL), which both have a value focus. Merchants is up 60.6%, while Temple Bar has gained 59.9%. Temple Bars performance turnaround led the trust to re-enter the FTSE 250 index earlier this year. Alex Wright, fund manager of Fidelity Special Values and Fidelity Special Situations, is bullish on the outlook for UK shares. He notes: Buoyed by increased optimism, UK equities have continued to rise over the past few months. Markets have been supported by upbeat corporate earnings and economic data releases that suggest strong rebound in activity, with consumers feeling increasingly confident. The outlook looks bright and we expect the UK economy to recover strongly over the remainder of this year as restrictions on domestic economic activity ease. Wright adds that even after the recent strong market performance, UK equities are still significantly cheaper than other regions. The UKs recent outperformance is the result of better earnings and not due to the narrowing of the valuation gap versus other markets. This is one of the key reasons why we believe the UK rally still has further to run, argues Wright. The idea behind value investing is that a catalyst will occur to revive an under-priced company's financial fortunes. This could be in the form of a restructuring, refinancing or management change that increases its earnings and dividend. As a strategy, value has largely outperformed growth over the long term. For well over a decade, however, until the vaccine breakthroughs last November, growth shares have comfortably outpaced value shares. This has largely been attributed to low interest rates, which have made richly valued growth stocks more alluring, as the expected future earnings of such companies when measured against the low cost of borrowing look more attractive.