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Specialized Funds

Value Investing with Mutual Funds

Mark P. Cussen Mar 24, 2015



Growth Investing vs. Value Investing


The existence of value funds is predicated on the assumption that the markets do not always price securities with total rationality all of the time. Therefore stocks that should be priced at a certain level may trade below that in some instances. These funds are therefore designed to profit by selecting stocks (usually of larger and more established companies that pay dividends) that the portfolio managers believe are currently undervalued for various reasons and will therefore rise in price in the future.

There are many reasons why a given company’s stock can trade for less than what it “should”, such as transient negative publicity from a company CEO getting caught in a personal scandal or a correctable defect that is discovered in one of the firm’s products. Value fund managers usually employ fundamental analysis to examine a company’s assets, financial ratios and other characteristics, including:

  • Low P/E (Price-to-Earnings) ratio – when the company’s stock price is low compared to its earnings per share
  • Low Price-to-Book ratio – comparing the current stock price to what the company would get on a per-share basis if it was liquidated
  • Low Price-to-Sales ratio – when the stock price is low compared to the company’s revenue per share relative to other similar firms in the industry
  • High Dividend Yield – as compared to similar companies
  • Future Earnings potential that has yet to be recognized by the market at large

Most value managers will then plug these factors into some sort of formula for finding these stocks, such as a set margin between the current stock price and what they feel it is worth.

Learn more about What Does a Mutual Fund Manager Do?.


The Appeal of Value Funds


These dividends also provide investors with a measure of current income in addition to capital appreciation. This combination of stability and dividends makes these funds a good choice for many conservative investors who need some income on top of their growth.


Drawbacks


Be sure to also see the 7 Biggest Mistakes to Avoid When Investing in Mutual Funds.


Five of the Best Value Funds


Vanguard U.S. Value Fund (VUVLX) – This fund has posted an average annual return of about 7.25% per year since its inception in July of 2000. Its annual expense ratio is 0.29% and it currently holds over $950 million in assets.

Delaware Pooled Large Cap Value (DPDEX) – This fund has accumulated almost $90 million in assets since its inception in February of 1992. It has also posted average annual returns of just over 10% per year since then and has an annual expense ratio of 0.68%.

Vanguard Russell 1000 Value Index Institutional (VRVIX) – One of the few small-cap value funds around, this giant has over a billion dollars under management and boasts an annual expense ratio of a mere 0.08%. Although it was only incepted a few years ago in September of 2010, it has posted an impressive average annual return of 17.8%.

Robeco BP All Cap Value Investors Fund (BPAVX) – This fund was incepted in July of 2002 and has posted average annual returns of almost 12% per year. The annual expense ratio is 0.95% with net assets of just over 170 million dollars.

See also The Cheapest Mutual Funds for Every Investment Objective.


The Bottom Line


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