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Partner Insight: The benefits of resilience in active multi-asset funds

While discussions around the resurgence of value stocks abound, find out why quality value and resilience go hand in hand for SustainableLife.

clock • 7 min read
Partner Insight: The benefits of resilience in active multi-asset funds
  • The current transition to a higher interest rate environment could provide the right conditions for value stocks to outperform over the long term. 
  • For the equity portfolio manager of our SustainableLife range, resilience is a key feature of the type of quality value stocks that the team looks to invest in. 
  • Resilient companies are able to emerge stronger from disruptive environments, which can lead to favourable investment outcomes over the long term for patient and pragmatic investors.

Economic and market conditions over the past decade or so have created an environment where value stocks have typically lagged their growth counterparts. When interest rates were close to zero, investors seemed to be more comfortable taking on risk and were willing to pay a higher price for growth stocks because they were more confident that they had the potential to outperform the market. 

However, the transition to a higher interest rate environment could provide the right conditions for value stocks to outperform over the long term. Value stocks can be temporarily out of favour with the market, but companies whose long-term prospects are believed to be attractive can be found at the higher-quality end of the spectrum. This can often apply to companies with resilient business models in more defensive sectors such as financials, industrials or healthcare. 

Value stocks are typically well-established companies with steady profits that are trading at a discount to what they're intrinsically worth. They tend to have reliable, sustainable business models and often pay dividends because of their regular cash flows. 

They tend to be found at the less exciting end of the market (in contrast to growth stocks whose share prices are expected to grow at a pace which is higher than the market average), but they shouldn't be overlooked. Typically, value stocks include battle-tested companies which have often emerged stronger from disruptive environments. For patient and pragmatic investors, this can lead to favourable investment outcomes over the long term. 

While there are different ways to measure a company's intrinsic value, Wellington fund manager Nataliya Kofman, who manages the equity portfolio of our SustainableLife fund range, looks for companies that fit her definition of quality value - and resilience is one of the key aspects that she focuses on.  

Resilience is a measure of future quality

Firstly, while quality and resilience often go hand in hand, resilience is a measure of future quality. Nataliya used to be an engineer designing car engines, so it's no surprise that one of the first examples that comes to mind for Nataliya relates to cars. 

While all cars lose their value over time, high-end luxury cars tend to be known for depreciating at the fastest rate. But quality that endures and improves over time—or resilience, as Nataliya likes to think of it—is special. 

Resilience is also revealed in the face of adversity. There's a reason you're often asked in an interview to share an example of a time you've faced adversity - a person who has successfully navigated difficulties is likely to have learned coping skills that make future stresses easier to manage.

These two beliefs combine to shape Nataliya's philosophy as a fund manager. She believes that resilience is an underappreciated facet of quality - and companies that successfully navigate periods of difficulty may have an edge when it comes to adapting to changing competitive, regulatory, social and climate forces. Crucially, these periods of difficulty can offer value to long-term investors, allowing them to buy high-quality companies at attractive entry points. 

For Nataliya, one of the main challenges to the investment process is the fact that large-cap investing is an efficient market. How can you exploit market inefficiencies to find undervalued growth potential? And how does this transition into a repeatable process? 

How to find quality value

Nataliya always focuses on buying stocks at a discount to their current market price. Unless a company is trading at a discount, she won't take it any further. 

A common transitory reason a company might see its share price trading at a discount is because of complexity or controversy. The market is quick to price in negative information but slower when it comes to taking a long-term perspective. 

When the market dismisses a company, Nataliya often takes it as a signal to take a closer look. Is the negativity justified - or are short-term roadblocks distracting from a more positive long-term outlook for growth?  Nataliya initiated a position in LyondellBasell, a chemical company with operations based in the US and Europe, in 2022, at a time when the share prices of chemical companies were cyclically depressed. This caused the company to trade at the low end of its historical valuation and provided an attractive entry point.

Analysing resilience is more art than science 

Resilient companies tend to demonstrate deep expertise in their fields, creating enduring value for their clients. They also tend to benefit from scale, providing operating leverage and natural barriers to entry for competitors. 

Strong balance sheets make it more likely that a company will be able to continue paying dividends, but balance sheet flexibility is particularly important when assessing for resilience, pointing towards the potential to invest and sustain dividends, which may dampen volatility for investors over time. 

Above all, Nataliya believes that resilient, dividend-paying companies purchased at a discount can present compelling long-term investments. She thinks that these companies are able to evolve over time and work through market turmoil, as well as having the potential to provide downside mitigation in a variety of market environments. 

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Investment risk information 

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Some funds invest in emerging markets which can be more volatile than more established markets. As a result the value of your investment may rise or fall.

Investments in smaller companies may be more volatile than investments in well-established blue chip companies.

Funds investing in fixed interest securities carry the risk of default on repayment and erosion of the capital value of your investment and the level of income may fluctuate. Movements in interest rates are likely to affect the capital value of fixed interest securities. Corporate bonds may provide higher yields but as such may carry greater credit risk increasing the risk of default on repayment and erosion of the capital value of your investment. The level of income may fluctuate and movements in interest rates are likely to affect the capital value of bonds.

The Funds may use derivatives in order to reduce risk or cost and/or generate extra income or growth. The use of derivatives could increase or reduce exposure to underlying assets and result in greater fluctuations of the Fund's net asset value. A derivative is a financial contract whose value is based on the value of a financial asset (such as a share, bond, or currency) or a market index.

Some funds invest in securities which are denominated in different currencies. Movements in currency exchange rates can affect the return of investments.

For further information on risks please see the "Risk Factors" section of the prospectus on our website.

Important information 

This is directed at professional investors and should not be distributed to, or relied upon by retail investors.

For further information on the fund's investment policies and risks, please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions. The KIID for this fund is available, alongside the prospectus via Vanguard's website. 

This is designed for use by, and is directed only at persons resident in the UK.

The information contained herein is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information is general in nature and does not constitute legal, tax, or investment advice. Potential investors are urged to consult their professional advisers on the implications of making an investment in, holding or disposing of shares and /or units of, and the receipt of distribution from any investment.

The Authorised Corporate Director for Vanguard Investments Funds ICVC is Vanguard Investments UK, Limited. Vanguard Asset Management, Limited is a distributor of Vanguard Investments Funds ICVC.

For investors in UK domiciled funds, a summary of investor rights can be obtained via https://www.vanguard.co.uk/content/dam/intl/europe/documents/en/Vanguard-InvestorsRightsSummaryUKFUNDSJan22.pdf and is available in English.

Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.

© 2024 Vanguard Asset Management Limited. All rights reserved.

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