Seeking out value, in my opinion, is the best way to generate better returns in the stock market. In my previous article, How to Find Value in Stocks, I have provided steps to find undervalued stocks.
Besides seeking out undervalued equity by looking at metrics of stocks, there are other alternatives. For readers who know that value investing is the best way to invest but might not have the time or interest to research on individual stocks, a mutual fund run by a value investor might be the next best option. An index fund will be the third option as it allows the passive investor to mark their return to an index. In this article, I will explore the option of investing in a mutual fund.
What is a mutual fund?
As defined on Investopedia, a mutual fund is an investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds and other assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. An advantage of mutual fund is that it gives small investor access to diversified portfolio of equities managed by famed value investors. “The most important thing is Value” says Howard Marks in The Most Important Thing. By investing in mutual funds run by fund managers who take a value investing approach, the investor is able to share in the investor's expertise and market return.
Top 5 value funds
Below is a list of 5 value funds that I believe are among the best funds out there. The criteria I looked at were funds that are value oriented, operated by famed value investors with at least a ten year consistent track record.
- Run by value investor, Donald Yacktman (Morningstar Portfolio Manager of the Year, 1991)
- Mutual fund employs an investment strategy of buying growth companies at low prices which combines growth and value
- Stocks that the fund purchases fulfills the following three attributes: (i) Good business (ii) Shareholder- oriented management (iii) Low purchase price
- Run by value investor, Bruce Berkowitz (Morningstar Domestic Stock Fund Manager of the Decade)
- Mutual fund employs a concentrated portfolio strategy with investment in a small number of companies
- Stocks that the fund purchases fulfills the following attributes: (i) Exceptional management that generates free cash flow (ii) Cheaply priced
- Investment partnership which is recognized by Warren Buffett as Graham-Doddsville Superinvestors
- Mutual fund employs investment strategy of appraising the intrinsic value of company using framework derived from work of Benjamin Graham
- Investments are made at a significant discount to intrinsic value of 40% to 50%
- Fund’s investment objective is long term growth of capital
- Stocks that the fund purchases have attractive long term prospects relative to the market price
Chou Associates Fund
- Run by value investor, Francis Chou
- Fund’s investment process is a value oriented approach with emphasis on company’s balance sheet, cash flow characteristics and management ability