Asset Allocator’s Soapbox: Evan Cook on the search for value

This week: Simon Evan Cook, investment manager at Premier Fund Managers, says the search for value opportunities is proving difficult.

In the current environment, being a value investor is like facing the M&S sandwich counter at 3pm – there’s not much left to choose from. With the selection seemingly limited to the investment equivalent of spam and egg, I look back fondly to a time when the value shelves were brimming. What would we give for the equivalent of Asian equities on 1x book now?

But the reality is those opportunities are long gone, so unless we swallow our value principles and pay up, we’ll have to work a little harder for our lunch.

But there are still choices. Perhaps the most obvious is large-cap, developed, high quality equities. These are unashamedly ham, cheese and pickle – the kind of dependable, no-frills option that’s been overlooked in the scramble for sweet chilli crayfish and mango wraps.

They may not set the world on fire, but in the current environment, in which economists can’t decide if inflation or deflation is the bigger threat, they represent a sensible choice. Against a deflationary backdrop, the best companies will be able to grind out steady results while grabbing market share from their weaker rivals. But if inflation strikes, they are likely to have the pricing power to deal with that challenge too.

They will probably not be the best asset class in either scenario: gilts are likely best if you know deflation is coming, while commodities and index-linked bonds look like winners if rampant inflation takes hold.

But those assets look expensive. If you back gilts, and inflation hits hard, you can expect heavy losses, while the same is true of linkers and commodities under persistent deflation.

So if it’s table-topping, career-making investment glory you’re after, pick your horse, sit back and enjoy the race. But if you accept that predicting the future is best left on the fairground, and that your clients are more concerned with not losing their money than having you shoot the lights out with it, quality blue-chips currently offer the best trade-off.

Within this theme, Japan is particularly interesting. Its equities were good value before the recent tragedy, so the indiscriminate sell-off that followed has left some of its best companies looking positively cheap. We’ll be steering clear of Japanese ETFs or trackers though – this is a market with as many zombies as hidden gems, so we’ll let good active managers sort the wheat from the chaff.

Healthcare stocks are also interesting, with the hot money herd put off by Obama’s healthcare reforms and the upcoming loss of drug patents for large-cap pharma companies. But these issues are priced in, leaving a suite of high quality companies on attractive valuations. The bigger risk here is once again relative, rather than absolute, as there is every chance they will continue to flounder for some time, and they will look highly pedestrian should the market regain its lust for risk.

Finally, we come to emerging market equities – the sweet chilli mango options that, until recently, were flying off the shelves. At the time of writing they still look a little pricey, but if they continue to prove hotter than most of their new owners expected, we may find them back on the value shelves sooner rather than later.

This would save us from the spam and egg option of low interest cash so, for me, it cannot come soon enough.