UK equities are a helpful value-factor proxy

UK equities are a helpful value-factor proxy.  Value-based investing is a persistent driver of returns over time.  But not all the time.  We explore UK equities’ embedded factor tilt and how it can help diversification.

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UK Equities are a helpful value-factor proxy

Henry Cobbe, Head of Research, Elston Consulting

Value-based investing is a persistent driver of returns over time.  But not all the time.

Indeed from the Global Financial Crisis in 2008 to end December 2021 value-factor equities have structurally underperformed growth- or momentum-factor equities.

However in periods of rising inflation and interest rates (like 2022) and greater economic uncertainty (like 2025), the more defensive value-style tends to outperform growth.

This is because when uncertainty is increased “jam today” businesses are less risky than “jam tomorrow” businesses.

Whilst there are a number of dedicated actively managed global value funds, we like to access the Value factor in three different ways:

1. For agility, we like iShares Edge MSCI World Momentum Factor ETF which uses a systematic index methodology that weights companies by their price/book ratio.  This creates a Value bias that makes it defensive.
   
2. For global funds, we like Dimensional Global Value Fund which is built on the academic principles of factor-based investing.
   
3. For UK funds, we like the VT Munro Smart-Beta UK Fund which uses a systematic index methodology that weights companies by forward looking dividend contribution. This creates both a Value bias that makes it defensive and a Yield bias that helps underpin returns.

Ironically, such is the make up of the FTSE 100 that it could be seen not only as a representation of the UK equity market but as (by nature of its constituents) a group of 100 traditional multinational companies in traditional indices with an inherent value bias.  By contrast, the tech-dominated US equity market has an inherent growth-factor bias.

We find UK large cap exposure to be a useful diversifier, not because of its geography, but because it is a value factor proxy to the growth-oriented US equity market.