This article is about the new investment process that was introduced while I was chief investment officer at Seneca Investment Managers, now part of Momentum Global Investment Management
There’s ample academic evidence that value investing works. This is most apparent in equities, but it can also bring success in other asset classes. Value investing is simply about buying assets when they’re cheap, and selling them when they’re expensive - why shouldn’t this approach be applied to the whole range of investable assets?
"We can’t guarantee the results we will achieve, but we can be clear as to how we manage money"
At Seneca, value investing is at the core of everything we do. We believe our Multi-Asset Value Investing approach is unique and offers significant advantage.
Adjustments to tactical asset allocation are made primarily in light of the yields available in different asset markets, relative to one another; their own histories; and where we sit in the business cycle. Yields which are higher than they ought to be are generally indicative of attractive future returns.
Value is predominantly apparent in UK equity mid-caps. We emphasise the combination of value and quality, expressed through companies’ ability to deploy capital effectively, and generate profit and dividend paying capacity. Our mid-cap holdings offer higher dividend yields, the same dividend cover, lower price to book ratios and significantly stronger returns on equity than their mid-cap peers. We can access secure dividends, significant re-rating potential and premium quality, without paying a premium price. What we do works, having comfortably out-performed both the mid-cap and all-cap UK markets over the five years to end 2016.
We access overseas equities indirectly, through funds, looking for like-minded fund managers who share our value ethos and invest in their own funds. Insisting on high active share, our open-door policy for experienced value managers starting out with new funds allows us to pick winners early. Prusik Asian Equity Income for example focuses on value, quality and high, sustainable dividend yields. The fund has significantly out-performed its benchmark since launch in 2011, when we first invested.
In fixed income, we invest directly and indirectly, though the former approach is reserved for developed government and investment grade debt, of which we currently hold nothing. Asset allocation decisions are a big determinant of fixed income positions, current thinking favouring the short end of the curve due to interest rate risk, and sub-investment grade for real yield pick up over the gilt. As with equities, yields which are higher than they should be point to strong future returns.
Opportunities in asset classes like infrastructure, leasing, property and private equity include streams that are more stable than those of equities, and more capable of growth than those of fixed income. We focus on the reliability of future cash flows, and the quality and future values of the assets from which the income is generated. Again, we’re happy to invest away from the crowd. We hold no mainstream property, rather, owning specialist vehicles such as Custodian, Civitas and AEW. These funds offer or aspire to higher yields than mainstream, and operate in niches which offer better returns than the relatively late cycle main-stream commercial property market.
Our clear value ethos, principles and selection criteria mean our clients know how we will behave as investors. We can’t guarantee the results we will achieve, but we can be clear as to how we manage money. We believe that this approach gives us the edge. We’re happy to be different and we’re aiming to win.
Published in Kepler Advisers
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.