Stay in growth, holiday in value?

According to Kevin Murphy, co-manager of Schroder Income fund, there are two environments in which the ‘value’ style of investing struggles: the first is in the tail-end of a bull market, when people are investing in assets irrespective of price, and the second is at the start of a recession, when people are selling assets irrespective of price.

So, having spent the past few years wondering when the bull market would ever end, only to be plunged into the worst global recession since the 1930s, the life of the value investor has not been an easy one over the past five years or so.

Save for the odd short sharp reversal (such as in 2016), the global value index has underperformed the global growth index by some 55%* over the past five years and many investors have started to question whether the style will ever come back into favour.

Such has been the infrequency of value’s strength in recent years, John Bennett, manager of Janus Henderson European Focus, raises the question in this podcast as to whether investors should “stay in growth and holiday in value.”

Another false dawn?

Historically, in a sharp market sell-off, stock prices fall indiscriminately, as investors panic and are in no mood to distinguish between the good and the bad. In due course, good businesses with strong balance sheets, that have been overlooked by most investors, then tend to be the first to find a floor – at which point they gradually outperform on a relative basis.

But value stocks have been slow off the mark this time – at least until the period of mid-May to mid-June, when value started staging a comeback. Is this a changing of the guard or another false dawn?

Once in a generation opportunity

Simon Adler, co-manager of Schroder Global Recovery, said: “The market is presenting a once-in-a-generation opportunity for value investors. The market drawdown towards the end of the first quarter saw the opportunity set for value investors grow significantly: some 40% of share prices around the world had fallen more than 50% from their 7 year high. For long-term, patient unit holders of value funds, history suggests the returns from today’s starting point should be significant; we do not say this lightly.”

Hugh Sergeant, manager of ES R&M UK Recovery, agrees that value investing is now looking attractive. “This is the best time in my career to invest in value, he told us in a recent podcast. “Small cap and value stocks were hit hard in March and the last time value was so cheap was in 2000. I’ve spent the last few months allocating money to recovery opportunities like Next, Coca Cola, Diageo and Autotrader – good companies that got hit. If we get inflation, we could see value do even better.”

Adrian Gosden, manager of GAM UK Equity Income, commented: “The gap between growth and value has gone exponential – in a low growth environment we have been pushed towards companies that can demonstrate growth and there is complete disinterest in value.

This gap is something that David Keir, fund manager at Saracen, has also highlighted: “Over time, and because of the long-term continued outperformance of growth and investor style drift, there are now very few truly value-orientated portfolios in the global arena. But the current underperformance of value is now so extreme that on the 15 May, growth’s outperformance of value hit an all-time high. We believe that this disparity is now simply too big for investors to ignore and note the significant improvement in value performance since then.

“The sharp and severe recession caused by the impact of Covid-19 may provide the stimulus for a long-awaited change in market leadership. Value usually outperforms post recessions.
And a combination of the steepest recession on record, with unprecedented monetary and fiscal support should help the recovery and increase investors willingness to rotate into value stocks.”

What do the multi-managers think?

Matthew Stanesby, co-manager of Close Managed Income, told us in a recent podcast interview: “We are worried about the short-term, but in the long term, we wouldn’t want to bet against value. You know it’s worked for centuries – ultimately share prices have to reflect the value of a company. Now the problem is, we don’t really know what’s happening shorter-term. What we might see is an extended period of lower interest rates and more quantitative easing, in which case value is probably not going to work. So we can, twist the portfolio slightly: we can allocate more money to the growthier names that we have, and mix and match styles.

John Chatfeild-Roberts, co-manager of Jupiter Merlin Balanced Portfolio, said: “It’s been hard for value funds. But never say never. No doubt fund management houses will de-emphasise value propositions and some may lose their jobs like in the tech bubble. But value funds will have their day again. When everyone has thrown their towel in and are going for growth, it will be time to turn to value!” The Jupiter Merlin portfolios also have a mix of styles.

But at the end of the day, as Bertie Thomson, co-manager of Brown Advisory Global Leaders, points point: “Isn’t every investor a value investor? The core of investment activity is buying an asset for less than you think it is worth – whether it is cheap or expensive – but you think can grow more.”

Investing basically comes down to what people are willing to pay for something. Some people are happy to pay up today and others will wait for a bargain.

*Source: FE Analytics, total returns in US dollars, MSCI ACWI Growth and MSCI ACWI Value, five years to 23 June 2020.