"Value" investing for the long term

InvestInPoker

I have read up a lot on investing in "value" stocks specifically but there is still something about the terminology that is tough to get a grip on for me.

Investopedia says the following is the definition of value investing

The strategy of selecting stocks that trade for less than their intrinsic values. Value investors actively seek stocks of companies that they believe the market has undervalued

Tim Hale says value companies are often described as "cheap or undervalued" or more aptly "distressed" stocks.

Following on from this although there are no guarantees there appears to be a strong argument that value stocks over a long period of time outperform "growth" stocks. In effect the investor is paid a premium for owning less healthy companies (if that is the correct definition) and taking on more variance in the short-medium term.

Now if I am wanting to take on this extra risk and mark a section of my portfolio specifically trying to capture this "value" premium I come across some stumbling blocks.

Firstly if I am buying a fund or two instead of picking individual stocks myself then surely the judgement that a stock is "undervalued" is subjective and thus it MUST be an actively managed fund? I see some passive funds trying to pick up on this area but in that case the focus appears to be on high dividend stocks which can only be a poor approximation of this area? I have also seen Morningstar mark FTSE all share tracker funds as "value" before - presumably only because there is a decent dividend payment there?

So do I have to use an actively managed fund to capture this premium fully? I thought these "special situation" type funds might be appropriate but I see Morningstar mark quite a few of them as "growth" which seems to me to be the opposite of what they should be. Then again it is probably true to say the "special situations" tag on a fund is just a marketing/advertising tool.

One thing I also cannot find is a smaller companies fund marked as "value". There must be some smaller companies out there who some consider to be "distressed" or "undervalued".

Tim hale recommends the dimensional funds to capture this value premium in his example portfolios. From what I can gather these are only available if you go through a FA or have £100,000 to invest in the fund. Neither apply to me so I am unsure how to approach this.

ColdIron

I suppose the trick is to discern under valued from down on their uppers, and not everyone gets it right, consider M&G's Recovery Fund

http://www.telegraph.co.uk/finance/personalfinance/investing/funds/11374978/MandG-Recovery-fund-is-it-time-to-sell.html

InvestInPoker

ColdIron wrote: »

I suppose the trick is to discern under valued from down on their uppers, and not everyone gets it right, consider M&G's Recovery Fund

http://www.telegraph.co.uk/finance/personalfinance/investing/funds/11374978/MandG-Recovery-fund-is-it-time-to-sell.html

Thanks for that ColdIron. Schroders recovery fund looks a better long term bet? I am not one for active funds for most things but I do not think it is possible to take on this sort of thing via a passive route so I will have to plump for one of these "recovery" funds if I want to invest in this area. The one you linked has done terribly last few years though.

Thrugelmir

InvestInPoker wrote: »

One thing I also cannot find is a smaller companies fund marked as "value". There must be some smaller companies out there who some consider to be "distressed" or "undervalued".

Within any portfolio there are only going to be certain stocks that offer value at any given time. Smaller companies are far less researched and often totally ignored by analysts in the main broking houses. I invest in smaller companies and have certain criteria as to the ones I will even consider. Let alone actually invest in.

masonic

InvestInPoker wrote: »

I am not one for active funds for most things but I do not think it is possible to take on this sort of thing via a passive route so I will have to plump for one of these "recovery" funds.

This was only launched in October, but how about the iShares MSCI World Value Factor ETF?