Between 1956 and 2011, the value premium has been worth an extra 3.5% in the UK1. That’s an annualised return – so that’s 3.5% on top of what you’d have wrung out of the FTSE All-Share, every year.

That’s the kind of come hither talk that pumps my assets, so I’ve scoured the fund universe for a way to get a piece of the action like a SETI telescope searching for intelligent life.

And lo, though I encountered plenty of slimy, betentacled hostiles, I’ve also made contact with more passive friendlies than I had previously believed possible.

The value premium for UK investors

We’ve discussed what the value premium can do for passive investors before. In this post, I’m going to survey the index funds and ETFs that UK investors can use to tap into it.

These funds invest in companies tattooed with the mark of value. Their equities are either undervalued or perceived to be riddled with risk. Either way their price is depressed enough that juicy returns can follow if fortune smiles.

By selecting these funds for our portfolio, we’re essentially hoisting our sail to capture those value winds. But we do so in the knowledge that the wind blows fitfully. There can be long periods where we trail the market because the winds don’t come.

Oh yeah, and before we go on, we need to admit that value investing is an active strategy.

Value funds have to decide on the rules that govern which firms they will choose to buy from the pick ‘n’ mix of all available equities. Inevitably these rules require more interpretation, compared to a tracker that simply scoops equities according to their market cap.

But that’s okay, passive investing isn’t an excuse to turn your brain off and it does often require more active decision-making than is routinely acknowledged.

Moreover, you can buy value funds from firms operating according to clear methodologies grounded in academic research – as opposed to financial Wizard of Oz characters proclaiming their preternatural ability to beat the market.

Now I’ve chased away the lily-livered with my torturous preamble, let’s get down to it. UK investors have four flavours of value fund to choose from (not counting hooking up with an international broker to access the myriad options in the US).

1. Dividend weighted funds

Equities that pay out high dividends in comparison to their price have value characteristics. However, a high dividend to price (D/P) ratio is the weakest form of value and has historically been outperformed by other measures such as book to price (often known as book-to-market).

It’s also worth considering that the price of equity income and dividend funds has jumped over the last few years, as bond yields have plummeted and income hungry investors have turned to equities.

That’s likely to lower the returns of dividend trackers in the future. All the same, they must be included in any UK survey of value funds.

2. Fundamental funds

Trackers that follow fundamental indices invest in the broad market (e.g. the FTSE All-Share) but don’t weight their components by the traditional method of market cap.2

Instead, fundamental trackers select equities according to health indicators such as profits, sales, and book value.

By investing in a fundamental tracker, you buy into a broad market fund with a stronger value signal than usual, without the issues of turnover and excessive concentration that can afflict other value approaches. The PowerShares FTSE RAFI ETF series is the brand champion in this arena.

3. Value factor funds

Value trackers follow an index of equities that rank highly for one or more value factors such as earnings to price, cashflow to price, price to book, and dividends to price.

This is similar to the fundamental approach except that the value tracker is ‘value concentrate’ as opposed to ‘value flavoured’. In other words, it comprises equities that represent the value subset of the market, rather than the entire market weighted in favour of equities with value tendencies.

Then there’s Dimensional Fund Advisors (DFA).

Dimensional are a fund shop who specialise in value. Their funds are extensively used by passive luminaries such as William Bernstein, Larry Swedroe, and Rick Ferri.

However, DFA funds are not index funds. They use a single factor – high book-to-market (price) – to select their equities, but they don’t follow an index.

This enables the firm to trade advantageously, keep costs low, and offer the widest range of value funds available in the UK.

Sadly, DFA funds are only available through approved financial advisors. Monevator specialises in DIY investing but, all the same, if you can find an advisor who’ll offer DFA funds for a reasonable fee then it’s an option worth considering.

4. Active funds

The advent of clean class options means that a few actively managed funds, with a value remit, are relatively affordable now that the commission price puffery has been stripped out.

You can use MorningStar’s style box to help you track down likely candidates, although I’ve only found two that I’d trust to stay on style.

A value fund hitlist for UK passive investors

Lordy, have I finally got to the point?

Here’s my selection organised by asset class:

Global Value Funds	Approach	Style3	OCF (%)4
Dimensional International Value Fund	Value factor	Large Value	0.57
PowerShares FTSE RAFI Dvlpd 1000 ETF	Fundamental	Large Value	0.5
PowerShares FTSE RAFI All-World 3000 ETF	Fundamental	Large Value	0.5
DBX Stoxx Global Select Dividend 100 ETF	Dividend	Large Value	0.5
Dimensional Global Targeted Value Fund	Value factor	Small Value	0.66
Dimensional Multi-Factor Equity Fund	Value factor	Mid Value	0.62

• Note: Global usually means developed world.
• Although the All-World fund does include emerging markets.
• Only the DFA International Value fund excludes the UK.
• The DFA Multi-Factor fund is a 100% equity fund of funds.

US Value Funds	Approach	Style	OCF (%)
UBS (Irl) ETF – MSCI USA Value I-dis	Value factor	Large Value	0.23
PowerShares FTSE RAFI US 1000 ETF	Fundamental	Large Value	0.39
SPDR S&P US Dividend Aristocrats ETF	Dividend	Large Value	0.35
Vanguard U.S. Fundamental Value Invr Inc	Active fund	Large Value	0.95

• Strange but true – Vanguard dabbles with active fund management. Here it has sub-contracted to a deep value specialist, Pzena Investment Management.

European Value Funds	Approach	Style	OCF (%)
Dimensional European Value Fund	Value factor	Large Value	0.57
PowerShares FTSE RAFI Europe ETF	Fundamental	Large Value	0.5
SPDR S&P Euro Dividend Aristocrats ETF	Dividend	Large Value	0.3
iShares EURO STOXX Ttl Mkt Value Large5	Value factor	Large Value	0.4
UBS-ETF MSCI EMU Value A	Value factor	Large Value	0.4

• You can roll your own international value allocation out of the US and European options.
• Completists can add the Pacific Rim and Japan. I haven’t checked these out.

UK Value Funds	Approach	Style	OCF (%)
Dimensional UK Value Fund	Value factor	Large Value	0.54
Dimensional UK Core Equity Fund	Value factor	Large Value	0.36
PowerShares FTSE RAFI UK 100 ETF	Fundamental	Large Value	0.5
Valu-Trac Munro UK Dividend Fund Class X	Dividend	Large Value	1.5
SPDR S&P UK Dividend Aristocrats ETF	Dividend	Large Value	0.3
Vanguard FTSE U.K. Equity Income Index	Dividend	Large Value	0.25
Aberforth UK Small Companies	Active fund	Small Value	0.85

• The DFA UK Core fund is a broad market fund that tilts towards value.
• The DFA Value fund specialises in value equities.
• The Munro fund is a dividend focussed fundamental fund. i.e. It doesn’t select equities according to their market cap. Recently acquired by Maven Capital.
• The Aberforth Smaller Companies fund has a near identical (but slightly cheaper) investment trust twin.

Emerging Markets Value Funds	Approach	Style	OCF (%)
Dimensional Emerging Markets Value Fund	Value factor	Large Value	0.72
PowerShares FTSE RAFI Emerging Mkts ETF6	Fundamental	Large Value	0.65
iShares DJ Emg Mkts Select Dividend ETF7	Dividend	Large Value	0.65
Dimensional Emerging Mkts Targeted Value8	Value factor	Mid Value	0.97

All table data researched in April 2013.

Remember, a fundamental tracker takes the place of a broad-based market cap fund in your portfolio, and adds a value accent to that asset class.

If you choose any other value approach then keep your core funds but split off a percentage of that asset’s allocation for the value fund.

Take a look at Tim Hale’s Global Style Tilts portfolio or look up William Bernstein’s Four Corner’s portfolio for portfolio ideas.

Also bear in mind that there is no strict definition of value investing. Research your own choices to ensure you understand how they work. Different approaches will bear different fruit and we have no way of forecasting which will prove to be the juiciest.

Perfection is academic

And now, for my final off-putting caveat: No value fund will capture the full value premium as defined by the academics.

That would involve going long value equities and shorting growth equities, which as passive investors we have no truck with, especially as we’d only use it to run over our own feet.

So think of your value fund like a sardine net. You’ll catch some of the shoal but not the whole lot. Some days (or years) you won’t catch anything, but when you do it will make for a nice, tasty lunch.

Take it steady,

The Accumulator

1. According to research by Dimensional Fund Advisors. [↩]
2. i.e. With the market cap method, if a company is worth 10% of the index then it makes up 10% of the tracker. [↩]
3. As per MorningStar classifications [↩]
4. Or TER. Learn more about the difference [↩]
5. Full name: iShares EURO STOXX Total Market Value Large ETF [↩]
6. Full name: PowerShares FTSE RAFI Emerging Markets ETF [↩]
7. Full name: iShares Dow Jones Emerging Markets Select Dividend ETF [↩]
8. Full name: Dimensional Emerging Markets Targeted Value Fund [↩]

Good reads from around the Web.

After typing my little fingers off last night with my thoughts on the response to the death of Margaret Thatcher, we’ll go straight to this week’s links today.

[continue reading…]

They say a week is a long time in politics. It feels like an eternity when the politician is dead.

Since the moment the Margaret-Thatcher-news-spectacle began, my Facebook feed has blazed with jubilation, Ding Dong The Witch Is Dead videos, and links to articles demonizing her and her achievements.

Par for the course among my intelligent middle class friends, for whom there isn’t an economic or social issue that can’t be addressed with a viral graphic, a hyperbolic Polly Toynbee article, or by ‘Liking’ a photocopied letter from a pissed-off pensioner.

I have no quarrel with somebody expressing disapproval of Mrs Thatcher or her policies, though on balance I admired the woman myself.

But the venom and ignorance of these 30- to 40-somethings goes beyond that.

My friends believe they are being engaged, but with their tribal mantras and kneejerk reactions they reduce themselves to bloc voters for career politicians and traffic conduits for linkbait articles.

They see the world not just through the prism of a media hyper-vigilant to any expression of truth or uncertainty, but also – thanks to the polarisation of the Internet – they see just one side of its manufactured debates.

Thatcher versus Kinnock has become Tweedledum and Tweedledee, and my friends all rage over rounding errors.

Wake Me Up Before You Go Go

I was on holiday when Margaret Thatcher died, which was why I was getting my news from Facebook.

I was also abroad when Diana died. Back then I learned the news from a discarded front page blowing across New York’s Central Park. Flying into London a couple of days later was slightly surreal – the city seemed quieter, and changed. Conversations were edgier, and unexpected people took offence. The mood passed and may have been an illusion but it was scary while it lasted.

This time I was prepared to find the UK in uproar. Going by my Facebook feed, the country was at war.

But no, it was just my friends – or my generation.

As I watched Question Time that night, I was relieved to hear a sane and balanced account of the Thatcher era. Even Polly Toynbee made an effort to be reasonable.

Phew! From my arguments on Facebook, I had begun to wonder if I’d invented the 1970s that sowed the seeds for Thatcherism.

My friends seemingly had no idea about the union brigands who’d helped run the country into the ground or the corporatist fat cats sitting on top of dying manufacturers like so many little King Canutes squatting on sandcastles as the water rose.

What about the economic transformations that swept the globe in the 1980s?

Question Time confirmed I didn’t invent globalisation and technological progress, either – though my friends seemed to think Mrs Thatcher did, given everything they blamed her for, including that life isn’t a Hovis bread advert of cobble streets and sunshine.

That would certainly come as news to the rest of the world that saw exactly the same economic forces at play. Even China was presumably a Thatcher side-project.

Thatcher’s critics imbue her with supernatural powers. It’s always easier to hate the player as opposed to the game. There’s a very good argument that she moved too far, too fast, but perhaps we only really know that through hindsight. I’d like to think it could have been less bitter, but I certainly don’t believe the bitterness was all her fault. Again, see the 1970s.

(Oh, and by the way, UK factories make more cars than we did in the late 1970s – and last year we exported a record number.)

Tainted Love

After availing my friends of such facts, my Facebook comrades inform me that even if the 1970s were that bad – which they doubt – why couldn’t we have modernised like Germany, which they regard as some kind of have-it-all Nirvana?

Because Labour tried to negotiate with the unions and James Callaghan was destroyed for his troubles.

Who? You can almost hear them tapping away on Wikipedia.

As it happens, my hosts this week were German, so I was on hand to see what some of them thought about the Iron Lady.

One septuagenarian aunt demanded to know why I wasn’t wearing a black armband.

She gripped my shoulder. “What Maggie did in the 1980s, Schröder could not do until 2004. You were the lucky ones!”

Still, Mrs Thatcher didn’t have to destroy the welfare state, did she?

Indeed she didn’t – the first thing she did was raise taxes, and state spending never fell much. Welfare spending actually rose sharply, although for all the wrong reasons.

And heaven forbid anyone should aspire to buy their own milk.

Pass The Dutchie

My generation – the Children of Thatcher who were born in the 1970s and came of age as she was booted out of office – appear certain of everything, but unwilling to learn much about anything.

Am I right to be so scared of what they represent?

I suggested to one that he considered the choices the country faced three decades ago before condemning Thatcher as evil incarnate.

Michael Foot’s Labour, for instance, wanted to withdraw from NATO and the EU, to hand over our nuclear weapons unilaterally, and to nationalise anything that hadn’t already been run into the ground. It wasn’t until New Labour that there was a credible alternative – and I voted accordingly in 1997.

Within seconds he was condemning Tony Blair as Thatcher in disguise.

The Land of Make Believe

Let’s not split hairs. My friends are idiots.

I love them, but they’re idiots.

They express or admire what would have been seen in the 1970s as hard leftwing views, but are now defined in the language of “fairness” and defined through opposition.

• All profits are bad, all welfare is good.

• All cuts are bad, but taxes are good (so long as they’re not paying).

• Capitalists are bad, engineers and doctors are good.

• Politics is bad, Twitter hashtags are good.

All fair enough if you’re a member of the 1970s loony left who has read Marx (as I have) and you believe in a socialist utopia.

But my friends haven’t read Marx, and I don’t believe their heart is really in the logical consequence of what they’re demanding.

My friends buy cheap trainers made in China, take cut-price flights around the world, switch energy providers with a moan when their bills rise, and job hop with abandon. They enjoy rising house prices, and they complain about council tax bills. As I say, they are Thatcher’s children.

Three of the biggest spouters of hard-left claptrap run their own businesses. They make extensive use of low-cost freelancers. They sell their wares across the world. Naturally and sensibly they structure their affairs tax efficiently. One was apoplectic in the hiatus before Entrepreneur’s Relief was introduced.

You cannot make it up.

Do they think they’d be doing this with 1970’s Labour in power, a Union shop steward squaring up against every staff decision, capital controls and more red tape than you’d see at an International Worker’s Day parade?

I’m certainly not saying they should vote Tory. But they could at least be realistic about where their business success and lifestyle springs from – and I honestly can’t see why they’re not all for Blair’s New Labour.

But no, they’d rather believe in some Ealing Comedy-accented economic Disneyland that never was.

Karma Chameleon

The disconnect – between why we live the way we do today and their fantasy politics – is by turns pathetic and terrifying.

But I shouldn’t be surprised by it – it’s been building for years.

The ink was not dry on the Coalition document before my friends started accusing the Conservatives of “taking a sledgehammer” to the welfare state. They sounded like a bunch of teenagers singing the UB40 favourites of their parents at a reunion concert.

One of them – one of the business owners – linked to a hysterical Toynbee article, calling it a: “Superb, dark, desperate article about the Conservatives’ barely-hidden agenda to tear down the state”.

He went on as usual to cite the devastation that had been caused by cuts, the millions unemployed, and so on.

I pointed out that state spending was still rising, and that Labour had (rightly) been committed to curbing spending, too, following the financial crisis – at least until it conveniently lost the election. (I suggested he read Alistair Darling’s excellent biography for more).

I even pointed him towards this graph showing state spending as a percentage of GDP was still rising. So much for destroying the State!

He looked at the graph and changed his tune to “most of the cuts are still to come”, which was at least accurate.

Presumably the mere sight of the sledgehammer in the box was what caused all the damage he claimed to have witnessed earlier on?

I am no apologist for the current government, who I consider timid and low-calibre. But tyrannical destroyers of the State they are not.

Stand And Deliver

I regularly go through the same rigmarole: some news event grabs my friends’ attention, they deposit a fanatical take on it on Facebook, and it is debunked by me or a handful of others until one of us loses interest.

But most are not debunked because there are only so many hours in the day. Instead there’s an orgy of agreement and the world gets a little dumber.

I find the Daily Mail unreadable and its coverage of Mick Philpott was no different, but I do think there is a point to be made about the extremes of benefit abuse. People need to trust the system to ensure its support.

My friends replied with graphs about tax avoidance.

I believe in the welfare state as a comprehensive safety net. If even half what my friends claim was true I’d be on the streets. But I also think the State has the clear capacity to enfeeble its citizens – and I don’t want to pay when it does.

If you want a welfare state, then you need to defend it against its abusers, as well as its opponents. My friends should be the first to demand action against those who exploit the taxpayer – and deprive the deserving – just as how as a believer in capitalism I have railed on Monevator for years about egregious bankers.

And incidentally, I didn’t have a spare bedroom until I was 33, and I pay about £200 a month for it. Is then the invidiously re-branded “spare bedroom tax” of £14 a week such a terrible deal? Resources will always be limited – wouldn’t it be better if extra rooms are directed at those who need them most?

Don’t bother asking my friends. Details. Don’t I know someone in the City lives in an expensive house somewhere or other?

It’s A Sin

Have you ever been down a coal mine? I have – in a highly sanitised form – and it was ghastly.

Mining coal was a dangerous, unhealthy, and basically dreadful occupation and I’m glad I’ll never have to do it.

But the left (and many on the right) love their sweatshops – and the very best worker is a sweating worker with a top unbuttoned and chest glinting.

I’m not going to presume to tell anyone who was mining coal in 1981 that Thatcher was good for them. Clearly the sense of community and camaraderie that made the mining life even half bearable was torn apart when the mines closed. They lost their jobs and many never got new ones. It must have been devastating. I am not surprised they hate her.

But my air-conditioned friends? If coal mining still existed, they’d be campaigning against it.

All Lost In The Supermarket

My friends remind me of shoppers in the meat aisle of Tesco.

They pick their way through the packaged bacon and the various cuts of chicken, and the thought of the screaming death of a pig or a chicken hanging from its feet to be electrocuted never enters their heads. Perhaps they occasionally march against fox hunting.

It’s the same with politics and economics. They don’t want to think about reality. They just want to enjoy the good stuff, and forget or dismiss what delivered it. Think of the last milkshake-guzzling humans going around in circles in Pixar’s Wall-E.

Like KFC has had the word chicken stripped from its name and the bones removed from many of its finger licking good products, so my friends aren’t capitalists or communists or socialists or anything else with a name, a face, or a spine.

They just want things to be “fair”. Anything can hide behind that innocuous word.

It’s the same with every hard problem they run into. Even the age-old question of religion was reduced to a one-liner by my generation, as this recent Spectator article points out:

“When such questions arise, a big bright ‘Complicated’ sign ought to flash in one’s brain. Instead, in the wake of 9/11, many otherwise thoughtful people opted for simplicity over complexity.”

If the meaning of life can be reduced to a joke poster stuck on a bus, what chance does politics stand?

Don’t Stand So Close To Me

To understand my generation, you have to see them as modern consumers who want to feel good at all times.

They want to eat everything they can, shout slogans about the dignity of the hooded-classes they cross the street to avoid, fly 5,000 miles to eco-resorts, and thrive in a system they claim to despise.

By and large they do nothing different to anyone who votes any other way. Perhaps they drink Fairtrade coffee, and like all of us they sponsor someone in the office when she does a charity run.

Sacrifice is conspicuous by its absence. They are not going without, nor are they out there campaigning. They’re pressing a button on a web page, and turning off a switch in their brains.

This is the generation, remember, who greeted the fall of communism by going on a ten-year bender in Thailand.

When they marched against the invasion of Iraq, I imagined they were marching against the indignity of the party ending.

Ghostbusters

‘I think we have gone through a period when too many children and people have been given to understand “I have a problem, it is the Government’s job to cope with it!” or “I have a problem, I will go and get a grant to cope with it!” “I am homeless, the Government must house me!” and so they are casting their problems on society and who is society? There is no such thing!

There are individual men and women and there are families and no government can do anything except through people and people look to themselves first…

There is no such thing as society. There is a living tapestry of men and women and people and the beauty of that tapestry and the quality of our lives will depend upon how much each of us is prepared to take responsibility for ourselves and each of us prepared to turn round and help by our own efforts those who are unfortunate.’

– Margaret Thatcher, 1925 to 2013

Note: I’ve said my bit here and I’m tired of arguing, so while I’d love to read your views below I won’t be responding. I appreciate some of you will entirely disagree with me and disliked Margaret Thatcher. I’ve got no problem with that – she was a divisive figure. But know your reasons. I’m more interested here in the demonization – and the social media ‘debate’ around modern politics. Be aware that anything abusive or flippant will be deleted.