The modern practice of value investing

I do like the idea of value investing. In daily life, there seem to be three types of value. One: "Tesco Value Range",  these products have a lower price point than brands with better quality. Two: Brand Sales, they are good quality products but are on discount for a certain time period. Three: Competitive Brand, they are good quality products at slightly cheaper prices than other brands with similar quality.  My shopping basket is made of a bit of all three - they all make me happy.  The following three managers have all managed superior performance but with very different take on the principles of value investing.

At the end of February, I was invited to an oval table lunch/presentation by two co-managers of the Schroder Recovery Fund,  Kevin and Nick, who are passionate advocates for value investing. They publish investment views regularly through their website and twitter account @Thevalueteam.  They describe themselves as contrarian, disciplined and open-minded. There is historic evidence that biggest annualised return over the last 10 years have been achieved by companies with lowest cyclical adjusted P/E. They believe the biggest driver of whether you make money is what you pay. Therefore, cyclical adjusted P/E is probably the first and foremost thing to look at when they select a stock.  Under this approach, you could end up having stock ideas that are very unpopular, and may remain so for very long time. So, investors of this type of strategy must be hardheads who are able to endure pains and be different to the consensus. What motivate them is the possibility of some stocks making staggering returns. Although the managers don't think the macro is playing important role in their investment approach, it is fair to say that the macro environment has been very favorable to their recovery strategy. The obvious beneficiaries of monetary and fiscal policies post financial crisis are UK bankings and home builders. Low interest rates also allow many small business to survive, or being bought, rather than fall into bankruptcy. I am inclined to view them as deep value investor.

Organised by CFA UK Value Investing Special Interest Group, I joined a talk/discussion led by Tim Sanderson of Sanderson Asset Management  in a pub. They are more along the line of investing in "good companies at reasonable prices" (Buffett).  Recognising the importance of initial purchase price in determining long term return, they place equal emphasis on compound profits' growth at a higher rate thereafter. Guided by this belief, their selection process tend to produce many ideas in the mid cap space. They look for solid balance sheets, proven profit growth over 5-10 years and potential for further growth in profits and dividends. I would say they are more conservative in pursuing returns.

An Investors Chronicle article drove my fascination in value investing higher by studying John Neff's investing approach. He looked for reliable, conservatively valued companies to hold for the long term. Specifically, he screened out the cheapest stocks - the lowest quarter of PE, as well as the most expensive. I would think this is also along the line of good companies at reasonable prices.

The principle does not only apply to stocks. In a fund update given by the country's top bond manager, Richard Woolnough, he shared one example of picking values with me after the event. At the start of the Euro Area Crisis, many institutional investors were selling the whole European stock indices in a heartbeat.  Nestle suddenly flashed on the computer screen in front of him at a price that could't be justified by its valuation. He made a decision to purchase the stock and the rest is history.

Finally, the view from Alex Grispos at Ruffer, who does not label himself as either value of growth but is also very successful, may provide an interesting perspective on this subject. Stock is a share of a business, he must like the business first. Hence his stock selection does not start with a quantitative screening. Surely there are many ways to invest successfully, please feel free to share your views and experience under this post.