equity income

Nick Purves and Ian Lance have been value investing for more than two decades. They employ a long-term approach, with a tried and tested investment philosophy that helps them preserve capital and growth by specifically focusing on identifying a company’s ‘intrinsic value’.

RWC equity income blog

Read the RWC equity income blog for the latest insights from our team of fund managers

10 pillars of value investing

1

SIMPLE BUT NOT EASY
Buying shares for less than their worth then selling when the value has been realised is easy to understand. But most don’t invest this way due to a lack of ‘sticking with it’. Value investing is tricky – we are hard-wired to conform – but can be rewarding.

1a

SIMPLE BUT NOT EASY
Buying shares for less than their worth then selling when the value has been realised is easy to understand. But most don’t invest this way due to a lack of ‘sticking with it’. Value investing is tricky – we are hard-wired to conform – but can be rewarding.

2

CYCLES, CYCLES, CYCLES
Profits and share prices are impacted by cycles such as credit, commodity and business. An investor’s overreaction can throw up opportunities. An advantage lies in knowing which cycles impact an investment and where we are in that cycle.

2a

CYCLES, CYCLES, CYCLES
Profits and share prices are impacted by cycles such as credit, commodity and business. An investor’s overreaction can throw up opportunities. An advantage lies in knowing which cycles impact an investment and where we are in that cycle.

3

BE CONTRARIAN BUT NOT MINDLESSLY CONTRARIAN
Investors love to buy what everyone else hates. But having respect for what the market is saying is key. Eagerly buying shares being sold in companies with too much debt, or declining profits, can prove costly and mindlessly contrarian.

3a

BE CONTRARIAN BUT NOT MINDLESSLY CONTRARIAN
Investors love to buy what everyone else hates. But having respect for what the market is saying is key. Eagerly buying shares being sold in companies with too much debt, or declining profits, can prove costly and mindlessly contrarian.

4

THERE IS NO SINGLE CORRECT METHOD
Value investing relies on estimating the intrinsic worth of a business. Our experience tells us to be flexible, by adjusting earnings for cyclicality, and to recognise the positive (hidden value), and the negative (e.g. pension fund deficit), on a balance sheet.

4

THERE IS NO SINGLE CORRECT METHOD
Value investing relies on estimating the intrinsic worth of a business. Our experience tells us to be flexible, by adjusting earnings for cyclicality, and to recognise the positive (hidden value), and the negative (e.g. pension fund deficit), on a balance sheet.

4a

THERE IS NO SINGLE CORRECT METHOD
Value investing relies on estimating the intrinsic worth of a business. Our experience tells us to be flexible, by adjusting earnings for cyclicality, and to recognise the positive (hidden value), and the negative (e.g. pension fund deficit), on a balance sheet.

5

BE PATIENT, BE LONG TERM
A struggling, out-of-favour business is unlikely to turn around the day after you invest. It’s more likely that things continue to get worse, so we try to be patient, allowing for profitability to improve and for the market to recognise it. Our typical holding period is at least five years.

5a

BE PATIENT, BE LONG TERM
A struggling, out-of-favour business is unlikely to turn around the day after you invest. It’s more likely that things continue to get worse, so we try to be patient, allowing for profitability to improve and for the market to recognise it. Our typical holding period is at least five years.

6
ADOPT AN ABSOLUTE RETURN MINDSET Value investing is a risk averse strategy born out of a reaction to the Great Depression. By buying a dollar of value for 50 cents, you build in a ‘margin of safety’ in case the economy and/or the stock market suffer. Value investors see risk as the risk of permanent capital impairment, so, invest with this at top of mind.
6a

ADOPT AN ABSOLUTE RETURN MINDSET
Value investing is a risk averse strategy born out of a reaction to the Great Depression. By buying a dollar of value for 50 cents, you build in a ‘margin of safety’ in case the economy and/or the stock market suffer. Value investors see risk as the risk of permanent capital impairment, so, invest with this at top of mind.

7
BARGAINS ARE RARE, MAKE THE MOST OF THEM It’s unlikely that you’re going to buy a business trading at half its intrinsic value. However, a company or an industry will suffer a drawdown at some stage, which may present an opportunity to buy at a good value.
7a

BARGAINS ARE RARE, MAKE THE MOST OF THEM
It’s unlikely that you’re going to buy a business trading at half its intrinsic value. However, a company or an industry will suffer a drawdown at some stage, which may present an opportunity to buy at a good value.

8

DON’T BUY RUBBISH
Recently the market has become fixated with quality and growth. Quality and growth are intrinsic to a business’ value. We’ve had success when high quality businesses have been questioned by the market, resulting in low value entry.

8a

DON’T BUY RUBBISH
Recently the market has become fixated with quality and growth. Quality and growth are intrinsic to a business’ value. We’ve had success when high quality businesses have been questioned by the market, resulting in low value entry.

9

CONSIDER PROBABILITIES AND PAYOFFS
No matter the research, there are always surprises, positive and negative. Think best and worst case scenarios. If we think a share price could go to zero, but has 400% upside in another, there is probably a case for investing.

9a

CONSIDER PROBABILITIES AND PAYOFFS
No matter the research, there are always surprises, positive and negative. Think best and worst case scenarios. If we think a share price could go to zero, but has 400% upside in another, there is probably a case for investing.

10
ENHANCE, DON’T DRIFT Discipline is key to value investing – stick to your philosophy, you’re here for the long run. Always look to improve and adapt as things change.
10a

ENHANCE, DON’T DRIFT
Discipline is key to value investing – stick to your philosophy, you’re here for the long run. Always look to improve and adapt as things change.

RWC does not accept any liability (whether direct or indirect) arising from the reliance on or other use of the information contained in it. No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment. No person may distribute, copy or publish this document or any of its contents, in whole or in part, for any purpose, without the express, prior written permission of RWC Partners Limited.

10 pillars of value investing

1. SIMPLE BUT NOT EASY

Buying shares for less than their worth then selling when the value has been realised is easy to understand. But most don’t invest this way due to a lack of ‘sticking with it’. Value investing is tricky – we are hard-wired to conform – but can be rewarding.

2. CYCLES, CYCLES, CYCLES

Profits and share prices are impacted by cycles such as credit, commodity and business. An investor’s overreaction can throw up opportunities. An advantage lies in knowing which cycles impact an investment and where we are in that cycle.

3. BE CONTRARIAN, BUT NOT MINDLESSLY CONTRARIAN

Investors love to buy what everyone else hates. But having respect for what the market is saying is key. Eagerly buying shares being sold in companies with too much debt, or declining profits, can prove costly and mindlessly contrarian.

4. THERE IS NO SINGLE CORRECT METHOD

Value investing relies on estimating the intrinsic worth of a business. Our experience tells us to be flexible, by adjusting earnings for cyclicality, and to recognise the positive (hidden value), and the negative (e.g. pension fund deficit), on a balance sheet.

5. BE PATIENT, BE LONG TERM

A struggling, out-of-favour business is unlikely to turn around the day after you invest. It’s more likely that things continue to get worse, so we try to be patient, allowing for profitability to improve and for the market to recognise it. Our typical holding period is at least five years.

6. ADOPT AN ABSOLUTE RETURN MINDSET

Value investing is a risk averse strategy born out of a reaction to the Great Depression. By buying a dollar of value for 50 cents, you build in a ‘margin of safety’ in case the economy and/or the stock market suffer. Value investors see risk as the risk of permanent capital impairment, so, invest with this at top of mind.

7. BARGAINS ARE RARE, MAKE THE MOST OF THEM

It’s unlikely that you’re going to buy a business trading at half its intrinsic value. However, a company or an industry will suffer a drawdown at some stage, which may present an opportunity to buy at a good value.

8. DON'T BUY RUBBISH

Recently the market has become fixated with quality and growth. Quality and growth are intrinsic to a business' value. We’ve had success when high quality businesses have been questioned by the market, resulting in low value entry.

9. CONSIDER PROBABILITIES AND PAYOFFS

No matter the research, there are always surprises, positive and negative. Think best and worst case scenarios. If we think a share price could go to zero, but has 400% upside in another, there is probably a case for investing.

10. ENHANCE, DON'T DRIFT

Discipline is key to value investing – stick to your philosophy, you’re here for the long run. Always look to improve and adapt as things change.

RWC does not accept any liability (whether direct or indirect) arising from the reliance on or other use of the information contained in it. No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment. No person may distribute, copy or publish this document or any of its contents, in whole or in part, for any purpose, without the express, prior written permission of RWC Partners Limited.

value investing at rwc partners

A focus on equity income and value. All of our funds are run to a single investment philosophy and process which simply aims to rotate around the market to where we see areas of undervaluation.

The capital cycle. We believe that companies go through a capital cycle in which high returns attract competition, thereby lowering profitability, whilst low returns result in capital leaving an industry, in turn leading to less competition and higher profitability. Investors tend to extrapolate recent trends, however, and assume high returns will continue indefinitely which, we believe, leads them to overvalue the most profitable businesses and under value businesses which are struggling.

Intrinsic Value Estimates. We value businesses by estimating their long run earnings potential. This helps us avoid companies which appear cheap but are in reality at the top of a cycle or in structural decline. Conversely, we are attracted to businesses suffering a temporary dislocation but where we believe earnings, and therefore the share price, are likely to recover in the future. For this value to be realised the companies must also have strong balance sheets and capable management.

TEAM

Ian Lance

Ian has thirty years of experience in fund management and started working with Nick at Schroders in 2007 before joining RWC in August 2010. Whilst at Schroders he was a senior portfolio manager managing the Institutional Specialist Value Funds, the Schroder Income Fund and Income Maximiser Fund together with Nick.

Previously Ian was the Head of European Equities and Director of Research at Citigroup Asset Management and Head of Global Research at Gartmore.

Nick Purves

Nick joined RWC in August 2010. Nick worked at Schroders for over sixteen years, initially starting as an analyst before moving in to portfolio management where he managed both Institutional Specialist Value Funds and the Schroder Income Fund and Income Maximiser Fund together with Ian Lance.

Prior to Schroders, Nick qualified as a Chartered Accountant.

John Teahan, CFA

John joined RWC in September 2010. He was previously portfolio manager at Schroders where he co-managed the Schroder Income Maximiser with Nick Purves and Ian Lance. In addition he co-managed the Schroder Global Dividend Maximiser, Schroder European Dividend Maximiser and Schroder UK Income Defensive funds, all three of which employed a covered call strategy.

During his time at Schroders John also specialised in trading and managing derivative securities for a range of structured funds. Previously he worked as a performance and risk analyst for Bank of Ireland Asset Management UK. John is a CFA Charterholder.

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