After more than a decade in the doldrums, the past few months have breathed a new lease of life into value investing, as the vaccine bounce and a Brexit agreement have resulted in an upturn in performance.
Save for the odd reversal (such as in 2016), value companies have underperformed growth companies on a global scale by some 150%* over the past 10 years. The question was not whether value was out of favour – but whether as a style it had become obsolete.
At the same time growth companies, such as technology firms, have reached new highs, aided by low interest rates and other accommodative monetary policy.
The Covid pandemic offered a further catalyst for growth, with investors increasingly moving online, bolstering these technological behemoths like the FAANGMs (Facebook, Amazon, Apple, Netflix, Alphabet/Google and Microsoft) to record highs. By contrast, value orientated industries like banks, retailers, insurers and utilities, all suffered during lockdown.
Value rallies have tended to be fast and furious in recent times – it’s been almost a case of blink and you’ll miss it. The trillion-dollar question is whether the re-opening of the global economy will add further fuel to these value-led sectors? By contrast, pessimists would point to there being little or no inflation in the system and a significant amount of pent up consumer demand - which could be just as beneficial to growth.
According to Bank of America, growth stocks represent companies that have demonstrated better-than-average gains in earnings in recent years and that are expected to continue delivering high levels of profit growth – although this not a guarantee.
Value fund managers look for companies that have fallen out of favour but still have good fundamentals, which have yet to be recognised by investors.
Growth stocks tend to thrive in a low interest rate world but also tend to suffer when the global economy begins to slow after a bull market. By contrast, value stocks often sit in cyclical industries and can do well in an early economic recovery, but struggle when in a strong bull market.
That brings us to an interesting point. We’ve seen a strong rotation into value recently – but it was from historical lows, with recent returns nominal compared to the past decade of growth outperformance. This means there is scope for far greater returns – particularly in a market like the UK, where there are a number of value-based sectors within the economy.
However, much of the value trade is predicated on inflation fears and the potential for central banks to raise interest rates - although they have repeatedly said they are unlikely to do this. We also have to understand the drivers behind the low rates, low growth world (which caused the quality growth stocks to outperform) haven’t changed. Demographics remain poor in developed markets; debt levels are high, and productivity is flatlining – making it difficult to justify a long-term value rally.
So how can investors gain exposure to value – without sacrificing growth? Thankfully, there are a number of funds which sit on the fence - giving you the potential for returns in either economic scenario. Below are a quartet of funds which fit into this style agnostic bucket.
The Fidelity Global Special Situations fund, managed by Jeremy Podger, has shown its ability to succeed in various environments. The portfolio is well diversified, with around 100 to 150 holdings and is unlikely to take large country or sector bets.
This fund has one of the best – if not the best – track records among open-ended funds for paying dividends. Manager Carl Stick maintains a concentrated portfolio of between 30 and 50 holdings. Carl is somewhat of a contrarian investor, so the fund may lag behind while his peers ‘catch up with the news’.
Backed by a highly intricate, in-depth research process, newly promoted manager Giles Rothbarth builds a fairly concentrated portfolio of between 35 and 65 stocks. The fund has a completely flexible investment style, which Giles is able to adapt based on where we are in the economic cycle.
Healthcare has shown itself to be a sector which performs regardless of any style being in or out of favour. The managers of this fund take a multi-cap approach, investing globally across pharmaceuticals, biotechnology, services and medical devices. They look for themes in the market and identify companies that are reasonably priced and with good growth prospects.
*Source: FE fundinfo, total returns in sterling, MSCI ACWI Growth and MSCI ACWI Value, 8 April 2011 to 8 April 2021
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and do not constitute financial advice.