The Value of Value Funds

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MP Images

As the Dow Jones, Nasdaq, S&P 500, and other indexes around the world continue to soar to record highs during 2017, I’d like to beg the question: Where should I put my money? To me, it sometimes seems like I can just throw my extra cash into any possible stock and feel good about it, but that’s probably an ignorant and unknowledgeable decision.

Everyone’s investment beliefs differ, but if you are interested in a stable, long-term investment opportunity, check out different Value Mutual Funds. Their investment strategies are just as the name would suggest: They attempt to find and invest in stocks that they deem undervalued in price, and usually pay dividends. For example, they examine stocks with a low price-earnings ratio, or stocks priced at a discount to their intrinsic value, or stocks seen as having a high potential of earnings growth (while placing less investment significance on its low price.) Essentially, they research companies on the exchange with underrated assessments, and then snatch up those stocks with the hope of seeing high growth in earnings (and stock price) in the future. Most funds take a multi-cap investment approach, with an added focus on high diversification. Due to the “value” approach these funds take, fees tend to be fairly low, and most provide proven long-term increases in cash. An example of one I found from a simple Google search: The Mackenzie Candill Value Fund, which you can check out here.

Value Funds are good to check out when valuations are steep and on the come-up, such as right now. Many times, they both find quality investment opportunities that many other investors would avoid, and protect your backside by providing mitigated risk; “[b]y buying a stock at a high margin of safety, the risk is mitigated to some extent while enhancing the return potential.” The safety lies primarily in the diversification of taste the funds supply investors with, where obviously risk is alleviated by placing your eggs in so many different baskets. Now, all the risk associated with Value funds comes from the fact that they tend to underperform in bullish markets, just because Value stocks fall out of favor when everything is ascending in price. This is the real significance of value funds, as they also outperform in economic downturns, which create healthy and consistent returns in the long run. Therefore, they are stable long term investments (A.K.A. low risk), and can actually still provide high returns when the market is way up, even if it’s falling short of the S&P.

U.S News came out with a ranking of the “196 Best Large Value Mutual Funds”, wherein they rated the Vanguard Equity Income Fund (VEIX) at the very top. Let’s quickly run through their investment values, holdings, and fund history.

The Value fund uses two separate teams to construct a portfolio of about 160 stocks; each team uses their own selection process. As the name “large value” would suggest, they primarily buy large-cap U.S. stocks with above average dividend payments. However, they attempt to avoid large dividend payments, as that may undermine the idea of a value stock. Overall, they seek slow-growing firms with higher yields, in an attempt to provide an “above-average level of current income, as well as long term capital appreciation.” Many, or even most, of these firms are well known company names, but the stock picks in this fund still usually outperform the large-value norm.

Here’s my re-creation of the pie chart representing VEIX’s portfolio by type of asset:

VEIX Asset Allocation

Source- U.S. News

Their largest holdings are in the financial services (17.85% of total portfolio) and technology sectors (14.21% of total portfolio), with the three highest company holdings being Microsoft, JP Morgan Chase, and Wells Fargo (the three take up just over 11% of all net holdings). The five-year stock returns on all 10 of their top holdings are positive, ranging between 3 and 23 percent, obviously indicating positive long-term returns across the board.

The total fund performance: “The fund has returned 14.97 percent over the past year, 9.05 percent over the past three years, 12.89 percent over the past five years, and 7.37 percent over the past decade.” As stated before, the fund consistently is above-average compared to the industry norm, however, when the S&P performs exceptionally well, the fund tends to fall short of the index by a couple points. But, “when the S&P 500 finished essentially flat in 2011, this fund handily trounced the index.” In the long-term, investors see returns consistently outperforming the large indexes.

The minimum initial investment is $3,000 dollars, and after that any additional investment is $1. The only fees relating to the fund are Management Fees, charged annually to shareholders, of .23%. Overall, expense ratios are low, providing a “cost-efficient ways to access steady dividends”.

The VEIX only re-iterates my important points of why Value funds can be a good long-term investment: 1) it performs well in the long-run, 2) it’s a low risk and cost-efficient investment, and 3) consistently provides an above-average income no matter the economic circumstances. So, if you’re wondering where to invest your disposable cash during this bull market, Value funds are a smart place for risk-averse investors with a long-term horizon.