As markets struggle at best to hold their ground amid the financial turmoil, the value investing style is likely to return to favour as a technique, says UK-based SVG Investment Managers.

“We are nearing the start of the next phase of strong performance from value style investors," said Tony Dalwood, head of public equities at SVGIM. “The last 15 months have been particularly difficult for traditional value style investors. However, there is evidence that this type of underperformance occurs around turning points of macroeconomic growth and lasts approximately 12-18 months and both these factors now appear to be nearing completion,” Mr Dalwood said in a briefing note.

“Historically, value investing styles have rebounded rapidly when periods of underperformance have come to an end, and this can present a compelling investment opportunity,” Mr Dalwood said.

SVGIM argues that equities are relatively cheap compared with UK gilts, saying that the earnings yield ratio is now at a similar level to the market trough in 1974, which may show the broader market has already priced in the economic and corporate woes that have been well-publicised and feared by the stock market.

“However, the UK market is structured very differently now and it is important to emphasise that UK plcs are generating close to peak returns on equity, and this should lead to falling profits over the medium term. Therefore we are being more discerning when seeking good value in the UK market; the most obvious example being banks. Companies with high dividend yields and payout ratios should perform strongly. Those companies offering high free cash flow yields as well as growth will either generate good returns or be subject to M&A by trade or private equity buyers over the medium term,” said Mr Dalwood.

SVGIM said private equity and more traditional value investors continue to see opportunities in the telecoms, media, technology and pharmaceuticals sectors. Increasing private equity activity is being seen in consumer-related companies, including pubs and specialist lenders. In addition, some private equity firms have evolved their business models, to include minority stakes in listed companies.

“A key driver of private equity investment is the gap between the free cash flow yield of investments and the cost of funding them. As a result, we have continued to see private equity exploiting this investment arbitrage witnessed by deals below £500 million in size, despite the constraints posed by the credit crunch,” explains Dalwood.

SVGIM is part of SVG Capital, a listed private equity investor and fund management business that was founded in 1996. As at 30 June 2008, SVG Capital had net assets of £1.1 billion. It says that since its flotation on the stock market in 1996, it has reported compound growth in net assets per share of 13 per cent a year.