Value Opportunity Funds
Value opportunity fund is a type of fund that uses 'value investment approach' when purchasing opportunities of different nature. Typically, value opportunity fund follows a bottom-up approach which involves analysis of specific company's characteristics, companies financial statements, management and organizational structure. The investment opportunity stems from the fact that the company represents good intrinsic value which is not reflected in its current share price due to diverse economic factors.
The work of Dr. Benjamin Graham in analyzing businesses and estimating intrinsic value in order to identify mis-priced securities is the philosophy of hundreds of professional investors. Yet despite what is ultimately a set of simple goals, very few funds have the courage to put them into practice.
The value opportunity fund aims to generate superior returns through intense in-house research on a company-by-company basis. Value opportunity fund's team applies a bottom-up investment approach that results in a portfolio of holdings, each selected for their distinct characteristics.
The typical value opportunity fund has a contrarian investment approach as it decides to step into investment opportunity when the "experts" suggest it is time to flee. Value opportunity fund's contrarian investing requires superior analysis and an understanding of investor psychology and the discipline to act on this insight.
Behavioral research suggests that investors ñ professionals included ñ consistently overprice what they perceive to be the best investments and under-price those they believe to be the worst. They tend to overreact in both directions. While most investors find comfort in widely accepted investment opportunities, value opportunity fund prefers the out-of-favors and the unpopular investment opportunities.
The success of the value opportunity fund investment strategy requires that most of the time managers decide to invest against generally prevailing beliefs in the marketplace and the views of experts. Therefore, each and every time value opportunity fund's team makes an investment decision, they need to be convinced and confident about it and believe that the stock market does not correctly value the securities all of the time.
In order to find the hidden value of an asset that value opportunity fund invests in, the managers need to look at non-typical areas. Companies meeting a particular value opportunity fund's investment criteria tend to often experience significant periods of business underperformance and, as a result, are subject to widespread pessimism with respect to the future. Value opportunity fund's team attention might be also attracted by a lack of interest on behalf of stock market and financial analysts, which suggests that a company has disappeared off the radar screen of mainstream investors a factor that in the view of many value opportunity funds represents an important indicator of potential value.
Once the shares are acquired, the value opportunity fund waits for the market to realize they real value. Often, the portfolio of value opportunity fund can be highly concentrated since due to general market factors many companies shares might be trading for less than intrinsic value at the same time. Shares will be sold only when they are fully valued or when political or social forces create favorable conditions for their sale.
Who should invest in value opportunity fund?
Investors to value opportunity fund should have high risk tolerance. People that would feel very comfortable investing in value opportunity fund are likely to have a contrarian approach towards different aspects of their day-to-day life. They should have rather long-term investment approach since it might take some time for the market to realize that a particular stock is undervalued and thus take actions that would lead to its price appreciation.