Fund/ETF for undervalued stock

Shocking_Blue

Dear all,
Saw in a recent thread a mention of an ETF that buys undervalued stocks (VVAL cited). Just wondered if members here had any knowledge of / pointers to funds/ETFs that focus on undervalued stocks.
Thanks in advance

bowlhead99

Traditionally, seeking out 'value' stocks is something that was more associated with active fund managers (Warren Buffett, Ben Graham come to mind) but in recent years more ETF products have launched following custom 'factor' indexes (value factor, size factor, momentum factor, etc) to try to identify through standardised formulas the 'factors' that would help active fund managers beat the index.

VVAL basically has a quantitative, formula-driven approach to allocating capital among the various equities in the developed world index, rather than simply weighting on market capitalisation without adjustment - 'undervalued' being with reference to having a low price to earnings, price to book or price to forecast earnings or projected cashflow ratio.   

So they would hold e.g. AT&T, Pfizer, CVS or Walgreens etc whose share prices are 8-15x their historic earnings, rather than Microsoft or Amazon or Tesla which are 30+ or 100+ or 1000+ respectively  . It doesn't mean they will necessarily be better to hold over the long term than a fund that includes the latter three, but people have been making active decisions about what companies might be good or bad value since stockmarkets began.

The Vanguard product is effectively tracking their own custom index with a basket of 1000+ holdings from the developed all-cap index, in the proportion they see fit. 

A similar concept is iShares iShares Edge MSCI World Value Factor ETF (ticker is IWVG in GBP or IWVU in USD) although that one has fewer holdings (approx 400) and aims to track MSCI's published index which is rebalanced semi-annually.

Over the last year both Vanguard and Ishares gave about the same return of -11%, the year before Vanguard was about -1% while  iShares +2%, the year before that they were both flat (under 1%), the year before that Vanguard was +17 to iShares +14%. 

So if you look over the last 4 years (Vanguard doesn't quite have 5 years performance) they are about the same, though those percentages could be quite different if you cut the dates differently.  What's clear is that 'value' focused holdings as been well behind 'growth' in recent years as some particularly large and highly valued companies have become even more highly valued, and the 'value' funds aim to steer clear of those so have missed lots of potential returns.  For example, the normal market-cap weighted FTSE World index is up 11% for the year to yesterday, while both these ETFs are down 11% instead.

That might imply it is time to pile in to 'value' stocks for the longer term, but it may not be - people said the same a few years back, and the people who used growth stocks instead (or a mixture of types) did better than those who formulaically looked for 'value'. 

Shocking_Blue

bowlhead99 said:

Traditionally, seeking out 'value' stocks is something that was more associated with active fund managers (Warren Buffett, Ben Graham come to mind) but in recent years more ETF products have launched following custom 'factor' indexes (value factor, size factor, momentum factor, etc) to try to identify through standardised formulas the 'factors' that would help active fund managers beat the index.

VVAL basically has a quantitative, formula-driven approach to allocating capital among the various equities in the developed world index, rather than simply weighting on market capitalisation without adjustment - 'undervalued' being with reference to having a low price to earnings, price to book or price to forecast earnings or projected cashflow ratio.   

So they would hold e.g. AT&T, Pfizer, CVS or Walgreens etc whose share prices are 8-15x their historic earnings, rather than Microsoft or Amazon or Tesla which are 30+ or 100+ or 1000+ respectively  . It doesn't mean they will necessarily be better to hold over the long term than a fund that includes the latter three, but people have been making active decisions about what companies might be good or bad value since stockmarkets began.

The Vanguard product is effectively tracking their own custom index with a basket of 1000+ holdings from the developed all-cap index, in the proportion they see fit. 

A similar concept is iShares iShares Edge MSCI World Value Factor ETF (ticker is IWVG in GBP or IWVU in USD) although that one has fewer holdings (approx 400) and aims to track MSCI's published index which is rebalanced semi-annually.

Over the last year both Vanguard and Ishares gave about the same return of -11%, the year before Vanguard was about -1% while  iShares +2%, the year before that they were both flat (under 1%), the year before that Vanguard was +17 to iShares +14%. 

So if you look over the last 4 years (Vanguard doesn't quite have 5 years performance) they are about the same, though those percentages could be quite different if you cut the dates differently.  What's clear is that 'value' focused holdings as been well behind 'growth' in recent years as some particularly large and highly valued companies have become even more highly valued, and the 'value' funds aim to steer clear of those so have missed lots of potential returns.  For example, the normal market-cap weighted FTSE World index is up 11% for the year to yesterday, while both these ETFs are down 11% instead.

That might imply it is time to pile in to 'value' stocks for the longer term, but it may not be - people said the same a few years back, and the people who used growth stocks instead (or a mixture of types) did better than those who formulaically looked for 'value'. 

Thanks, Bowlhead.
Was just thinking of the potential opportunities when undervalued stocks as a result of current Covid situation make an upturn.
Thanks.

bowlhead99

Shocking_Blue said:

Was just thinking of the potential opportunities when undervalued stocks as a result of current Covid situation make an upturn.

Perhaps look to an active fund, special situations fund or the like where fund managers are making judgements about what stocks are 'undervalued as a result of current covid situation' and might make an upturn.

Some such stocks may not even be on the radar of funds which buy automatically based on some index screening indicators (as the ETFs need to do);  for example the most recent profits of airlines might be negative (so the price is more than infinity times the earnings, doesn't sound like good value even there is upside if they survive another few years) or may be contingent on some company or industry-specific issues which a person could make a judgement call on rather than just accepting that the price assigned by the market as a 'fair' compromise between the upside and downside potential and probability.

If you are looking at ETFs it implies you are more of a 'passively follow the index' kind of person (as that's what ETFs generally do); and therefore are broadly comfortable with whatever prices the market assigns to stocks, so VVAL or IWVG may not be an obvious choice. Whereas if you are more of an active investor with a strategy of getting exposure to value stocks separately from your exposure to growth stocks, then the newer 'factor' ETFs may be a cheap way to help with that without paying an arm and a leg in ongoing charges.

Thrugelmir

VVAL has some 1,198 holdings.  Possibly too many to ever be a great performer. 

Shocking_Blue

bowlhead99 said:

Shocking_Blue said:

Was just thinking of the potential opportunities when undervalued stocks as a result of current Covid situation make an upturn.

Perhaps look to an active fund, special situations fund or the like where fund managers are making judgements about what stocks are 'undervalued as a result of current covid situation' and might make an upturn.

Some such stocks may not even be on the radar of funds which buy automatically based on some index screening indicators (as the ETFs need to do);  for example the most recent profits of airlines might be negative (so the price is more than infinity times the earnings, doesn't sound like good value even there is upside if they survive another few years) or may be contingent on some company or industry-specific issues which a person could make a judgement call on rather than just accepting that the price assigned by the market as a 'fair' compromise between the upside and downside potential and probability.

If you are looking at ETFs it implies you are more of a 'passively follow the index' kind of person (as that's what ETFs generally do); and therefore are broadly comfortable with whatever prices the market assigns to stocks, so VVAL or IWVG may not be an obvious choice. Whereas if you are more of an active investor with a strategy of getting exposure to value stocks separately from your exposure to growth stocks, then the newer 'factor' ETFs may be a cheap way to help with that without paying an arm and a leg in ongoing charges.

Thanks. My portfolio is essentially passive, but I'm looking to get a little more active on the periphery. Was thinking of just stock picking (the internet is not short of 'tips' on such stock, which do seem to make sense, and the same names do tend to crop up), just as an add on to the main portfolio, but thought there might be funds that had this feature as part of their strategy. May just set aside a smallish amount for active stock picking.
Thanks

MaxiRobriguez

Passive "value" investing is going to see you invested in utter dogs who are cheap for a reason.

If you want to get into the value game, either find an active fund or do it yourself. But be warned, value investing has significantly underperformed growth investing for a number of years now and despite repeated "it will turn around soon" for the last half decade, COVID impact has increased the disparity between the two styles rather than brought them closer together.

Personally I like to find blends of the two. Buy a growth company when it's been knocked back a bit (f.e Boohoo) or buy a value stock when growth prospects look intriguing (f.e Prudential). The only proper value stock I hold at the moment is MnG.

Shocking_Blue

MaxiRobriguez said:

Passive "value" investing is going to see you invested in utter dogs who are cheap for a reason.

If you want to get into the value game, either find an active fund or do it yourself. But be warned, value investing has significantly underperformed growth investing for a number of years now and despite repeated "it will turn around soon" for the last half decade, COVID impact has increased the disparity between the two styles rather than brought them closer together.

Personally I like to find blends of the two. Buy a growth company when it's been knocked back a bit (f.e Boohoo) or buy a value stock when growth prospects look intriguing (f.e Prudential). The only proper value stock I hold at the moment is MnG.

Thanks.
I'm certainly not going to jump in and would only ever dabble, but I am keeping an eye on a handful of stocks that have crashed this year, trying to decide when they've bottomed out. Know this is probably incredibly naive, but I'm not going to throw £ at something until I feel it's a calculated decision.

MaxiRobriguez

Shocking_Blue said:

MaxiRobriguez said:

Passive "value" investing is going to see you invested in utter dogs who are cheap for a reason.

If you want to get into the value game, either find an active fund or do it yourself. But be warned, value investing has significantly underperformed growth investing for a number of years now and despite repeated "it will turn around soon" for the last half decade, COVID impact has increased the disparity between the two styles rather than brought them closer together.

Personally I like to find blends of the two. Buy a growth company when it's been knocked back a bit (f.e Boohoo) or buy a value stock when growth prospects look intriguing (f.e Prudential). The only proper value stock I hold at the moment is MnG.

Thanks.
I'm certainly not going to jump in and would only ever dabble, but I am keeping an eye on a handful of stocks that have crashed this year, trying to decide when they've bottomed out. Know this is probably incredibly naive, but I'm not going to throw £ at something until I feel it's a calculated decision.

The trick is to work out why they have crashed and whether that level of sell off is justified. Not all value/crashed stocks are a bargain - some sell-offs are occurring because the business is either impacted by certain events or it's just had a torrid time of late for their own reasons, which ends up making the stock by typical measurement expensive.

It's not easy to identify good value stocks, and requires patience and resolve in your decision making. It's been far easier and more profitable in recent years just buying mega cap/tech, who knows when that will change. 

Shocking_Blue

MaxiRobriguez said:

Shocking_Blue said:

MaxiRobriguez said:

Passive "value" investing is going to see you invested in utter dogs who are cheap for a reason.

If you want to get into the value game, either find an active fund or do it yourself. But be warned, value investing has significantly underperformed growth investing for a number of years now and despite repeated "it will turn around soon" for the last half decade, COVID impact has increased the disparity between the two styles rather than brought them closer together.

Personally I like to find blends of the two. Buy a growth company when it's been knocked back a bit (f.e Boohoo) or buy a value stock when growth prospects look intriguing (f.e Prudential). The only proper value stock I hold at the moment is MnG.

Thanks.
I'm certainly not going to jump in and would only ever dabble, but I am keeping an eye on a handful of stocks that have crashed this year, trying to decide when they've bottomed out. Know this is probably incredibly naive, but I'm not going to throw £ at something until I feel it's a calculated decision.

The trick is to work out why they have crashed and whether that level of sell off is justified. Not all value/crashed stocks are a bargain - some sell-offs are occurring because the business is either impacted by certain events or it's just had a torrid time of late for their own reasons, which ends up making the stock by typical measurement expensive.

It's not easy to identify good value stocks, and requires patience and resolve in your decision making. It's been far easier and more profitable in recent years just buying mega cap/tech, who knows when that will change. 

Thanks.
This is the sort of info that I'm generally pointing to:
https://www.morningstar.co.uk/uk/news/204527/10-undervalued-uk-stocks.aspx

MaxiRobriguez

Shocking_Blue said:

MaxiRobriguez said:

Shocking_Blue said:

MaxiRobriguez said:

Passive "value" investing is going to see you invested in utter dogs who are cheap for a reason.

If you want to get into the value game, either find an active fund or do it yourself. But be warned, value investing has significantly underperformed growth investing for a number of years now and despite repeated "it will turn around soon" for the last half decade, COVID impact has increased the disparity between the two styles rather than brought them closer together.

Personally I like to find blends of the two. Buy a growth company when it's been knocked back a bit (f.e Boohoo) or buy a value stock when growth prospects look intriguing (f.e Prudential). The only proper value stock I hold at the moment is MnG.

Thanks.
I'm certainly not going to jump in and would only ever dabble, but I am keeping an eye on a handful of stocks that have crashed this year, trying to decide when they've bottomed out. Know this is probably incredibly naive, but I'm not going to throw £ at something until I feel it's a calculated decision.

The trick is to work out why they have crashed and whether that level of sell off is justified. Not all value/crashed stocks are a bargain - some sell-offs are occurring because the business is either impacted by certain events or it's just had a torrid time of late for their own reasons, which ends up making the stock by typical measurement expensive.

It's not easy to identify good value stocks, and requires patience and resolve in your decision making. It's been far easier and more profitable in recent years just buying mega cap/tech, who knows when that will change. 

Thanks.
This is the sort of info that I'm generally pointing to:
https://www.morningstar.co.uk/uk/news/204527/10-undervalued-uk-stocks.aspx

BAT/Imperial: Relies on non-developed markets continuing to smoke in large numbers. Not guaranteed. Forex risk. Large play in vaping, but if vaping ends up the same way as smoking scientifically speaking at least, then market is limited.
HSBC/Lloyds: Not paying dividends currently. Could be global negative interest rates imminently which would weigh on profitability. COVID not done with yet, businesses getting less support from governments may go to the wall in greater numbers causing more bad debts for banks.
BP/RDS - Much sunken cost in fossil fuel investment. More nimble energy companies utilising new-tech renewables could disrupt. 
BT - Needs to overhaul their infrastructure across the country and is saddled with debt/pension requirements.

Don't know enough about advertising/defence industries to pass comment on WPP and Meggitt. 

Out of that list I already own BT but I'm not massively fond on it and have considered swallowing the losses already incurred since I bought it. HSBC is on my watchlist but a long way from actual purchase yet. 

Besides practically all of these are high up the FTSE100, so you'd probably find it cheaper to just buy a FTSE100 tracker and you'd get similar returns.