One of the challenges in observing investment markets, especially over shorter durations, lies in the frequent disconnect between share price movements and the underlying fundamental reality of the businesses represented.
We often witness share prices fluctuate in ways that seem detached from tangible results. While sometimes an explanation appears obvious, trying to draw causal links between daily news and price shifts often proves to be futile.
The market, after all, is not merely reflecting the present state; it is continuously attempting to gauge the future, leading to fluctuations based on shifting expectations.
Looking past short-term noise to find long-term value
At Phoenix, our approach seeks to look through this noise, anchored by a focus on intrinsic value. This represents our assessment of a business’s true long-term worth, serving as our North Star. Estimating this value involves deep, sometimes unconventional, research utilising our DREAM framework.
Within this system, we assess numerous factors but also explicitly rate our confidence in that rating and the depth of our work, acknowledging that greater depth can sometimes reveal more uncertainty. This explicit separation helps foster clearer thinking and guards against analytical bias. This process yields a probabilistic range for intrinsic value, reflecting inherent uncertainties, from which our central estimate is derived.
The process of distinguishing between price and value is a central tenet of value investing. Successfully differentiating between a price decline that creates value and one that reflects destroyed value is paramount. It allows informed action to convert market fluctuations into investment advantage.
For the latest factsheet and Q1 Commentary, please see here
UK Equities: seeing opportunity where others see weakness
Applying this intrinsic value framework to UK equities offers a perspective contrary to prevailing narratives. Persistently weak share prices and factors like sustained divestment by domestic pension schemes and the overhang of past political challenges, understandably foster a view that depressed valuations reflect structural challenges.
Our assessment differs. The fundamental drivers of economic prosperity and corporate profitability appear, to us, largely unchanged. Developments such as AI seem poised to potentially boost productivity, an opportunity a service-oriented and adaptable economy like the UK should be well-placed to capture.
From our viewpoint, therefore, lower equity prices currently signify greater potential value rather than impairment.
UK Housebuilders: valued less than land with compelling businesses
UK housebuilding is a good example. Current equity valuations stand some 30-40% below their 2019 levels, with companies trading at less than the assessed value of their purchased land.
The fundamental characteristics remain compelling; large housebuilders generate high returns on capital, supported by structural factors like land, supply constraints and scale advantages – realities acknowledged in the CMA’s detailed sector study.
Even absent any market re-rating, ownership of these businesses near liquidation value presents the prospect of strong returns fuelled by underlying earnings and asset appreciation.
And yet the future is one of growth. A key tenet of the current government’s economic growth initiative involves increasing housing supply. Streamlining planning is a low-cost route to spur activity, while a growing housing market has a significant multiplier effect throughout the economy.
For the 2024 Annual Report, please see here
Growing gap between price and value
Another way to express our view of the current opportunity is by looking at intrinsic value at the portfolio level. Each quarter, we reassess the intrinsic value for every holding; the portfolio figure constitutes the weighted average.
The Trust’s net asset value today is 255p, compared to 234p at the end of 2019. In contrast, our estimate of intrinsic value stands at 650p today, versus 420p in 2019.
Put differently, the market price has risen by only 9%, but we think value has increased by 55%. The upside to intrinsic value has risen from 60% to 155%.
Confident in delayed gratification
Our experience suggests that such wide disparities between market price and intrinsic value typically precede periods of strong performance.
This conviction is underpinned by concentrated holdings in businesses where our knowledge is deep, often accumulated over decades of research.
While timing remains unknown, we focus on the underlying value, relying on that metaphysical piece of elastic connecting price and value.
We know the greater the stretch, the stronger the eventual pull.
