The term value fund refers to a portfolio of stocks that are deemed to be undervalued by the market. The objective of a value fund includes not only providing investors with capital appreciation, but also a steady stream of dividends.
Value funds specialize in purchasing equities of companies the fund’s management team estimates are undervalued by the market based on each company’s fundamentals. These are oftentimes relatively mature companies operating in slowly growing industries. With limited opportunity to invest in expanding operations, these companies will often return a large proportion of earnings back to shareholders in the form of dividends.
Companies may be deemed undervalued for a number of reasons, but all have fallen out of favor with investors, which oftentimes translates into relatively low price to earnings ratios. The value investor believes this market inefficiency is temporary, and the company’s shares will eventually increase at a rate that outpaces the overall market.
Investors choosing value funds will have relatively low risk tolerance scores, since the focus tends to be on preservation of capital rather than growth. For the same reason, these funds can be expected to exhibit below average volatility.