Still, from a UK perspective, Tony Dalwood, chief executive at Gresham House suggests the “bifurcation of valuations” with investors focusing on growth and momentum companies suggests returns from value style investments will significantly outperform the market in the longer-term.
“Current index valuations are relatively high – traditional valuation metrics are at the upper end of the spectrum with average P/E multiples of 17.4x and a dividend yield of 2.5% for the FTSE small-cap index (ex. Investment Trusts) – but areas of good investment value can be found,” he says.
“Further evidence that we are close to the end of another bull market cycle is provided by the average transaction multiples paid by private equity which has been increasing over the last five years and deals are now priced on average at 10.5x EBITDA with 5.4x Debt/EBITDA, similar to levels in 2006/2007.”
So what of fund managers? Notable GARP (growth at a reasonable price) investor Nigel Thomas, manager of AXA Framlington UK Select Opportunities, has been focusing primarily not on valuations but on how a firm treats its shareholders.
For example, big holdings are Betfair, Rightmove and ITV which will convert 100% of their profits into cash. He also points to Next, which he says has retired 60% of its equity over the past 14 years via share buybacks. Understandably he also endorses being consistent in approach.
“Value has done very badly against growth for the past 12 months, and if that mean regresses I will not turn up to a client meeting and say ‘I’m a value investor this year, not a growth investor’,” he says.
“There was a period in the second half of 2012 when value did much better than growth and I underperformed, mainly because of banks where I am always underweight.”
