Key Takeaways
- A value fund invests in stocks perceived as undervalued based on fundamental characteristics.
- Value investing contrasts with growth investing, which targets emerging companies with high growth potential.
- Value funds focus on stocks believed to be priced below their intrinsic value.
- Investors choose value funds aiming for long-term capital appreciation.
- Value funds can carry less risk but require patience as undervaluation may take time to be recognized.
What Is a Value Fund?
A value fund is an investment fund that focuses on buying stocks believed to be undervalued based on their financial fundamentals, such as earnings, revenue, or assets. This is different from growth investing, which targets companies expected to grow quickly, even if their stocks are already expensive. Value funds look for companies trading below what managers believe is their true worth, with the goal of benefiting when the market recognizes that value. Knowing how these funds work can help you see how this strategy compares with growth investing and the benefits for a long-term portfolio.
How Value Funds Operate
Value funds and value investing are often synonymous with strategies developed by investors Benjamin Graham and Warren Buffett. Value managers choose stocks for value funds based on the fundamental characteristics associated with a stock’s intrinsic value. Value funds are typically used as long-term investing allocations that have the potential to grow steadily over time. Value fund investing is thus often associated with investment due diligence and patience.
Nearly every large fund family offers a value fund. Value funds are often broken down into varying components. One of the most popular categories for variation is market capitalization. For example, investors may choose from a fund family that includes small-, mid-, and large-cap value funds.
The premise behind value investing is that the market has some inherent inefficiencies causing specific companies to trade at levels below their actual worth for various reasons. Value fund managers are skilled in identifying these market inefficiencies. In theory, once the market corrects these inefficiencies, the value investor will gain from an increase in the share price. Often value stocks are also associated with dividend payments since they are usually well-established companies with committed dividend distribution programs.
Tip
A blend fund (or blended fund) is a type of equity mutual fund that includes a mix of both value and growth stocks. These funds offer investors diversification among these popular investment styles in a single portfolio.
Noteworthy Examples of Value Funds
Below are four examples of some of the investment market’s value mutual funds and exchange traded funds (ETF).
Vanguard Equity-Income Fund Investor Shares (VEIPX)
The Vanguard Equity-Income Fund Investor Shares focuses on investing in large-cap companies that pay investors above-average dividends. The fund is best for investors who want higher yields and have a long-term investment horizon.
ClearBridge Large Cap Value Fund (SAIFX)
The ClearBridge Large Cap Value Fund is an actively managed value fund that seeks capital appreciation and income through a value-focused investing strategy. The fund offers multiple share classes. It also pays a consistent quarterly dividend.
Invesco S&P 500 Enhanced Value ETF (SPVU)
The Invesco S&P 500 Enhanced Value ETF tracks the performance of the S&P 500 Enhanced Value Index. Fund managers invest at least 90% of the fund’s assets in stocks that are part of the underlying index. Stocks in the index have a high “value score,” which means they tend to be undervalued based on fundamental analysis.
iShares Edge MSCI USA Value Factor ETF (VLUE)
The iShares Edge MSCI USA Value Factor ETF is an index fund. It seeks to replicate the holdings and return of the MSCI USA Enhanced Value Index. The index includes U.S. large- and mid-cap stocks with value characteristics that trade at a comparatively low valuation.