Other ways of identifying value involve looking for shares with a high dividend yield or those with a low price to earnings ratio relative to the rest of the sector. This is the exact opposite to what a growth investor would do, as they are primarily interested in the potential of the company to increase its future earnings. These sorts of stocks are typically characterised by higher PE ratios and lower dividend yields.

Meera Patel

Value underperformed during the dot com bubble of 1999 and 2000 but then dominated right through to March 2009. The subsequent stock market recovery has been led by cyclical stocks, which tend to be more growth orientated.

From the low point of March 3rd to the end of December, the FTSE Lower Yield Index  which measures the performance of growth stocks in the UK rose 54%. The equivalent measure of value, the FTSE Higher Yield index, was only up 43%. This lag explains why lots of fund managers are now switching into the more defensive value shares.

Patel says that stocks can move from one category to the other over time. “During the dot com bubble Telecom companies were seen as growth stocks, but these businesses are now more cash flow orientated and pay dividends, which puts them firmly in the value camp.”

Two of the strongest performing value funds are M&G Recovery and Investec Special Situations, while on the growth side there is Schroder UK Alpha Plus. This distinction is also prevalent amongst the investment trusts, where the main value options include: British Empire Securities, Aberforth Smaller Companies, Lowland and Finsbury Growth & Income.

Nick Sudbury. Money Market UK