One hundred and fifty years ago, Anthony Trollope penned the magnificent novel, The Way We Live Now. It was a book inspired by the financial shenanigans of the early 1870s, where greed and dishonesty abounded, influencing the political, commercial and intellectual life of the era.
It was also a period of great change, with the US at the start of a journey that would result in its domination of Western democracy and, thereafter, a world of American hegemony.
One cannot help but ponder what Trollope would make of the world today, where some, if not all, the problems of the past are being repeated and where the old-world order is being upended.
While this may seem a long-winded introduction, it is in fact a way of articulating some truisms about investing. Firstly, despite the world experiencing constant crises, it never actually ends, and long-term investing is always rewarded.
Secondly, in a world of choices, there are stealth bull markets that are quietly making their presence felt. While the prevailing investment theme is how artificial intelligence (AI) will change the world as we know it – a trend that is seeing investment capital flowing freely to form the next bubble – we can equally observe myriad alternatives that are bubbling away in the background.
The first of these is the slow dawning that value-orientated equity strategies are winning in many markets and, in fact, they have been doing so for a number of years.
Previously, many markets were dominated by the popularity of high-growth stocks, which are always the top picks in periods of low interest rates and easy money, but this phase ended abruptly when bond yields rose, prompting investors to move away from longer-duration equities.
At this point, certain markets that had not participated in the growth fad were startlingly cheap. A classic example of this was the UK equity market.
Immediately after the Covid slump, deep value funds, such as Schroder Recovery, thrived as most sectors offered compelling value. In the past two years, the market has become more nuanced, but relative value strategies have still been favoured, with the likes of Ninety One UK Special Situations, Artemis UK Select, Jupiter UK Dynamic Equity, JPM UK Dynamic and JOHCM UK Dynamic taking full advantage of the opportunities on offer.
A special mention goes to the Schroder UK Mid 250 fund, managed by the inimitable Andy Brough, who has delivered a tremendous return despite the headwind of investing outside the largest stocks in the index.
The UK is still unloved by global allocators but continues to flourish despite the difficult political and economic backdrop. This can be ascribed to UK plc’s reaction to the general malaise in UK share prices, which has motivated companies to accelerate their restructuring, buy back ever more shares and continue to pay solid dividends.
Japan is our next favourite example of a stealth bull market based on more than just liquidity. Here, we see the authorities’ push to make companies offer higher returns on equity play out in earnest.
Companies are being restructured, capital is being returned to shareholders through buybacks and dividends, and because labour is no longer cheap as the population ages, capital expenditure on the likes of automation is making a real difference to productivity.
Value-orientated funds such as Man Japan Core Alpha, WS Zennor Japan Equity Income and Nomura Japan Strategic Value have shone brightly in this environment, although many of the very best funds of all styles have found a way to play the specific dynamics in the Japanese market, which is still relatively unloved by asset allocators.
Finally, in equity land, value strategies in emerging markets have dominated the leader board as managers have taken advantage of compelling valuations. Another supportive factor has been the shift in asset allocation preferences in favour of emerging markets, based upon the idea that American hegemony is waning.
Within the Global Emerging Markets sector, Invesco Global Emerging Markets, M&G Global Emerging Markets and abrdn Emerging Markets Income Equity have performed well during this more constructive period for the asset class.
This then leads us to the vexed question of what to do with the dominant beast that is the US equity market. Even here we are witnessing some straws in the wind.
Deeper value and higher-yielding strategies are no longer languishing in the corner as the likes of utilities and financials vie with the technology sector in terms of performance for the year.
BNY Mellon US Equity Income and JPM US Equity Income are two funds that have overt value credentials and are focused on delivering a higher yield than the market.
Finally, on the subject of hidden gems, a word on gold. We have been holding an allocation to gold miners in clients’ portfolios for more than three years, attracted initially by the diversification it afforded in inflationary times, as well as gold’s store-of-value attributes against the backdrop of rising political tensions.
Now, the strategy has morphed into a way to play the immense free cashflows that miners are generating at these elevated gold prices. This will be a more volatile phase for the precious metal, but still, we believe, rewarding.
Peter Toogood is co-managing director of investments at Fund Research Centre. The views expressed above should not be taken as investment advice.