Value Fund
Candlefocus EditorValue fund investing is quite simply buying stocks which the market has undervalued. This approach is based on the idea that over time, a company’s true worth will be realized, and the share price will rise. As a sensible and potentially profitable long-term investing strategy, value funds focus on well-established companies, offering investments with dividends. While there are no guarantees, the track record of leading value investor Warren Buffett highlights the potential of this particular style of fund.
Value fund investing is not a passive form of investing. Instead it requires comprehensive research and analysis of individual companies to identify those with significant upside potential. Such investments have the right fundamentals, including strong revenue growth, healthy cash flow, and financially capable management. While the evidence of core financial performance supports the value of the stock, it is overlooked by the market, resulting in opportunity for the value investor.
Successful value fund investors will often look beyond financial figures to assess the strength of a company’s intangible assets, such as its branding. They will also factor in macro economic considerations to decide if industry seasonality or certain global events could have an impact on the value of a company’s stocks.
Value fund investing carries lower risk than those funds that focus on stocks growing rapidly in price, or ‘growth stocks’, simply because value fund shares are usually from mature and large companies. Such companies tend to experience steadier ups and downs than the price fluctuations associated with growth stocks, because the appetite and value of the companies they offer is less volatile.
Value funds are extensively popular with all types of investors, particularly those with a long-term view of the markets, due to their potentially lower risk and higher reward potential. Value funds are also attractive to those who appreciate passive investing as it only requires minimal ongoing management for the investor.
However, there are some inherent risks associated with value fund investing. As the market will generally know more about a company’s prospects than the investor, it is possible that the apparent undervaluing of a stock is actually an accurate assessment of its worth. This is known as the ‘value trap’ and is an important risk to bear in mind.
In summary, value funds offer an appealing form of long-term passive investing for those who are comfortable with the assessment of companies. Warren Buffett’s success over time has demonstrated the potential of identifying stocks with significant untapped potential, but value funds come with risks, and every investor need to be aware of these. By following his lead and thorough research, value fund investors may identify stocks to add to their portfolio with the potential of a large upside and dividend payments in the future.