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The 15 best shares and funds for the “trade of the decade” – UK value stocks

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The Financial Times this week carried an article with a startlingly catchy headline: “Why UK value stocks may be the trade of the decade.”

The paper was running a commentary from fund manager Rob Arnott, who was claiming that British value stocks – defined as those appearing cheap for their dividends or assets – would double investors’ total returns in the next six years, compared to just 25% for global developed world shares generally.

That was the case, he said, even though prices have risen sharply since their low points last year.

As Arnott asked: “While most investors are transfixed by the pandemic crisis and Brexit, surprisingly few ask: “Will these events matter much in five years?”

With Arnott’s spirit in mind, we asked two experts at the retail platform AJ Bell for their picks of the best value stock plays.

Backing undervalued shares is risky because there may be a jolly good reason why they’re so lowly. You have to trawl through some dross to find that hidden goldmine, and get there before the rest of the world finds it and drives up the price.

Wall Street investment guru Jim Grant put it typically wittily: “Successful investing is having everyone agree with you… later.”

It can be a lonely place. Star investor Alastair Mundy once described it as being like sitting in a restaurant on Valentine’s night on your own.

In other words, it’s pretty darn risky. So, to hedge your bets, we offer here some funds investing in a multitude of value shares as well as individual stock picks.

We start with the individual share tips from AJ Bell’s Russ Mould.

First, he warns what to avoid: too much debt, bad governance, regulatory or structural change to its industry (is it selling widgets for new diesel cars that will be banned in a few years, or is Amazon about to come into its market and squash it?).

Sometimes, he says, value can be found in turnaround plays no one thinks will turnaround. Perhaps they’ve been lumped in unfairly with a bad bunch of peers. Perhaps they have a new strategy or management team who are turning it around without anyone noticing yet.

In general, he adds: “You’re having to look at the unpopular stuff and probably wade through some smelly stuff to do. That’s value investing for you.”

But enough of all that: here are his tips:

Russ says: “I like the discount to net asset value of this stock, and the business mix has changed. It’s now a prime play on e-commerce warehouses and affordable housing outside the overcrowded South East

Russ says of the Daily Mail newspaper owner: “This business just looks very cheap on a sum-of-the-parts basis.”

I’d add here that DMGT has a 30% stake in Cazoo, the online car auction site that’s going to be doing a multi-billion dollar float in the coming months. I’m not sure that’s reflected fully in the share price.

Just is a financial services company that specialises in retirement products. It recently declared it had achieved a financially sustainable capital model under a turnaround plan which appears to be about a year ahead of schedule.

Russ says: “The share price has gone from 69p to 99p this year alone but it still trades at barely half of its book value.”

Classic value stock, then, if management can keep up the turnaround progress.

The online casino and bingo brands group partners with Sir Richard Branson for Virgin Games and Virgin Casino and owns a host of other games including Monopoly Casino and Megaways Casino. It just announced record results for 2020 and its share price has been on a tear.

Russ says: “It’s still very cheap on adjusted earnings and free cashflow yield. The debt is coming down and it produced maiden dividends in 2020.”

Translation: this is a stock that’s moved from being a young, capital intensive play to one that’s throwing off cash and can start paying dividends so you can now get income on top of potential share price gains.

Vistry, Crest Nicholson, Redrow, Bellway

Russ puts these housebuilders in the same hod because they share the same value stock characteristics.

As Russ says: “Builders tend to trade near 1x historic book value (or net asset value) when times are bad, or 2x when times are good. Currently , they’re in the middle to low end of that range and NAV will grow as profits rise. The government is stoking demand through its various initiatives despite there being short supply which should also play in their favour.

This is a global power generation company with assets in places as wide ranging as Trinidad and Mexico to Kosovo, with thermal, hydro electric, wind and solar plants.

Russ likes the stock because it has “bags of cashflow and a decent yield”.

The dividend yield is currently running at 5.59% according to dividenddata.co.uk, so you can see what he means. All that cash means the divi is safe as houses.

Russ says of the insurance giant: “Aviva looks cheap and is getting its act together.”

Under new chief executive Amanda Blanc, the company has been disposing of non-core assets at a pace. However, even if it is probable better run as a leaner, meaner machine, understanding insurance companies’ accounts is exceptionally complicated. If you don’t understand them either, it may be one to handle with some care.

The Congestion charge operator’s turnaround has been a long time coming and has taken far too long to carry out disposals. But this week chief executive Jon Lewis launched another restructuring which includes £700 million of targeted disposals which, as Russ points out “isn’t much less than the value of the whole company.”

…and now for the funds chosen by AJ Bell’s Ryan Hughes:

Fidelity Special Values IT:

Ryan says: “This is a very experienced fund manager investing across the market cap spectrum.” [translation: Fidelity are pros and this fund picks small, medium and large sized companies].

“Currently 13% geared so if you want value, this will give you plenty of exposure to the likes of Legal & General, Serco and Pearson.”

[translation: the fund uses some borrowing to buy more stock, so if the picks turn out right, you’ll get more bang for your buck on the shares in it. Or vice versa…]

Jupiter UK Special Situations Fund

Ryan says: “Clear investment process that dispassionately focuses on out of favour medium and large companies. Big holdings include BP, GlaxoSmithKline and Imperial Brands.

Man Undervalued Assets fund:

Ryan says: “Multi cap approach [translation: different sized companies] that is highly active and very different to the benchmark with over 50% outside of the FTSE 100. Big holdings include Royal Dutch Shell, Rio Tinto and EasyJet.

Schroder Global Recovery Fund:

Ryan says: “Focuses on deep value out of favour companies. Massively underweight [low on shares in] the US and technology and overweight [big on shares in] the UK, Japan and energy

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