When investors get nervous, the one stock market segment that finds attention is “value funds” as investors look for protection but can still get upside of the stock market. Following the recent Morningstar Investment Conference, the widespread feeling seems to be that the equities market is pretty much fairly valued and that what happens next depends to a large extent on what happens in the US economy. If the economy gets stronger, then equities could get some help. If not, equities could face some serious headwinds. The translation: the smart guys and billionaires are telling investors to focus on “Value Picks” rather than chasing stocks.
Just looking at performance of several funds and ETFs for the past three months, holding steady would be good. Here’s a look at five value plays: Pioneer Cullen Value Y (CVFYX), Vanguard Selected Value Investors (VASVX), iShares S&P 500 Value Index ETF (NYSE: IVE), iShares Russell 2000 Value Index ETF (NYSE: IWN), and Financial Select Sector SPDR (NYSE: XLF).
The Pioneer Cullen Value Y (CVFYX) is a large value fund that seeks capital appreciation by investing in securities. Over the past 10 years the fund has posted an annualized return of 7.5%, topping the S&P 500 Index by some 4%. The fund’s assets total $5.2 billion and its top 10 holdings account for 20.46% of its assets. The NAV on Friday was $18.46, in a 52-week range of $15.30-$19.81. The fund carries a 4-star rating from Morningstar.
The Vanguard Selected Value Investors (VASVX) is a medium-cap value fund that seeks both long-term capital and income growth. Over the past three years, the fund has gained 17%. Assets total $4.4 billion and the top 10 holdings account for 20.34% of the fund’s assets. The NAV on Friday was $19.24, in a 52-week range of $15.39-$20.68. The fund gets a 4-star rating from Morningstar.
The Fidelity Value Fund (FDVLX) invests in common stocks with an eye toward capital appreciation. The fund’s assets total $8.8 billion and its top 10 holdings account for 13.22% of all assets. The fund’s top four holdings are energy or electricity-related stocks and seven of the top ten are energy or electricity-related. The fund has been shedding shares in its top four holdings. The NAV on Friday was $69.53, within a 52-week range of $53.86-$75.87. The fund is massive, yet it has a 2-star rating from Morningstar.
The iShares S&P 500 Value Index ETF (NYSE: IVE) is a large-cap value ETF that attempts to replicate the S&P 500 Value Index, net of expenses. The fund’s performance for the past 10 years is essentially flat, as is its performance over the past 3 years. That last is important considering the market nose-dive in 2008. Fund assets total $4.3 billion and the top 10 holdings account for 19.63% of its assets. Shares closed at $60.22 on Friday, in the 52-week range of $48.65-$65.26. The fund gets a 2-star rating from Morningstar.
The iShares Russell 2000 Value Index ETF (NYSE: IWN) is a small-cap ETF that tries to duplicate the performance of the Russell 2000 Value Index, net of expenses. The fund’s assets total $4.2 billion and its top 10 assets account for 4.82% of its total assets. Shares closed at $69.54 on Friday, within a 52-week range of $54.60-$77.00. The fund has a 3-star rating from Morningstar.
The Financial Select Sector SPDR (NYSE: XLF) is usually not considered a “Value ETF” because it is a financial sector-specific ETF that seeks to duplicate the performance of the Financial Select Sector Index. The fund’s heavy exposure to the financial sector led to a loss of more than -50% of the share price between 2007 and 2009. Since then it has made a lukewarm recovery. The fund’s assets total $7.1 billion and its top ten holdings account for 51.08% of its total assets. The reason this fund shows up on a value screen is undoubtedly related to the depressed price-to-book ratio and low forward P/E ratio of its major holdings and because Bank of America Corporation (NYSE: BAC) and Citigroup Inc. (NYSE: C) are both trading at discounts to book value. Shares closed at $14.83 on Friday, within a 52-week range of $13.29-$17.20. Here is something that stands out like a sore thumb: the ETF trades about 70 million shares a day, yet it carries only a 1-star rating from Morningstar.
The two funds with large cash or US Treasury derivatives holdings, CVFYX and VASVX, have performed best over the past few years, but as the prospect of inflation continues to rear its head these funds might face some pressure. Likewise, uncertainty about the economy and interest rate risk could weigh on the prospects of the equities-based ETFs. When (or at least if) the financial sector swings back into favor, XLF will cease to be a value choice. Even now, it now it looks like a risky choice for value investors.
Paul Ausick
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