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Value investing's set for a comeback, says RWC's Gambhir
The RWC Europe Absolute Alpha fund has struggled recently, but Gambhir says an increased emphasis on dividend yield in Europe will boost performance longer term.
The fund – a pick of Citywire Selection – uses a combination of 'long' and 'short' positions to make money and control risk. On his long list are shares and other investments he thinks will rise in the long term and on his short list are shares and investments he thinks will fall in value. The 'short' position means the fund will make money if they do fall.
In recent months France has become a key country bet for the fund with Gambhir maintaining a higher net exposure (that's the longs minus the shorts) to France than Germany as the market looks better value. Net exposure to Germany had declined as the economic outlook had weakened. Gambhir likes the global nature of many of France's big companies, which he thinks the market is overlooking.
'In France we see very low valuations for companies that happen to be listed in France but are actually multi-national companies. Such stocks seem to have de-rated as concerns have mounted over France’s deficit reduction plans lacking credibility,' he said.
Large companies looking historically cheap
Overall, Gambhir's long book is currently carrying a distinct value bias as he thinks a range of large and very large companies look historically cheap compared with their small and medium-sized rivals. In the six months to the end of May this saw him increase his weighting to large companies by 10% to around 74% of the £240 million portfolio.
'It is interesting to note that the valuation gap between the median stock in the market and large-cap stocks is at very high levels, with mega-cap stocks between 15% and 20% cheaper than the median stock in the European markets,' he said.
Gambhir is backing his long book to be more fruitful over the coming months if the resurgence of value-style investing continues, with the long book currently having a weighted dividend yield of 5%.
'The data points that I see are that value as a style has underperformed for four years. Yet last year one particular subset of the value style gained traction, and that was dividend yield. It has begun to gain traction again in the last couple of months, so I see perhaps that as a sign of future outperformance of that style which would favour the long book,' he said.
Shorting industrials and miners
At the same time, Gambhir expects his short book to benefit from a recognition that slowing global growth is not just a Europe issue, but a global one, with his long-standing bets that the industrials, mining and construction sectors will suffer further falls in share prices.
The fund has endured some tough times in recent months, but Gambhir is confident that his value-driven approach and an increased emphasis on dividend yield in Europe will boost performance over the longer term.
'Managing a portfolio is part conviction and part managing probabilistic outcomes to give you a positive skew of performance. I have a conviction that dividends should prove attractive to investors given low bond cash yields, especially given the strength of corporate balance sheets in Europe. The timing of this I cannot say with any certainty though,' he said.
In the past few weeks, Gambhir has continued to profit from his shorts on global growth proxies such as mining and industrials as well as from certain financial stocks, while the long book saw outperformance from high-yielding stocks in sectors such as telecoms, the oil majors, utilities and selective financials.
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