River and Mercantile’s Sergeant: Is this the tipping point for UK value?

UK value stocks trading at a multi-generational low are now at a tipping point, presenting a glaring valuation opportunity for investors, according to River and Mercantile Asset Management’s Hugh Sergeant.
Deeply discounted value stocks in sectors such as materials, financials and energy have seen share prices trade near multi-year lows this year, retracing much of 2016’s recovery and underperforming other factors materially despite a fleeting rally in late June.
However, Sergeant, CIO Equities and manager of the £180m River and Mercantile UK Equity Long Term Recovery fund, believes signs are now building that earnings at such businesses are starting to accelerate, with the potential for current valuations to mark the low point for value investing.
“The stocks seeing the strongest earnings upgrades are trading at a big valuation discount, close to the relative low points reached over the last thirty years,” he says.
“All you need is a merest hint of the cost of money moving up and the reflation and value trade takes off again as it did in the last couple of weeks of June.
“Therefore, we are positioned for a multi-generational bull market in government bonds coming to an end and a multi-generational low in the value cycle bottoming out.”
Sergeant employs a process called PVT (Potential, Valuation, Timing) to select stocks for the UK Equity Long Term Recovery fund and others he manages. PVT works by investing in companies with high potential to create significant shareholder value, but only via stocks bought at low valuations, and at the right time.
Currently this translates to an overweight in miners and banks, among other cyclicals, with the largest overweights versus the market including Anglo American, BHP Billiton, and Lloyds.
“We added significantly to areas such as the mining majors, which remain high scoring recovery stocks via our investment process, on even higher discounts to medium term intrinsic value after their continuing share price corrections in 2017,” he said.
Over the last five years, the UK Equity Long Term Recovery fund has returned 148.4%, compared to its benchmark, the FTSE All-Share Index, which achieved 63.7%. The IA UK All Companies sector average over the same period was 70.4%^[1].
[1] According to FE Trustnet data, the R&M UK Equity Long Term Recovery fund B share class has returned 148.4% over five years to 31/08/17, versus the IA UK All Companies sector average return of 70.4%.