Investors backing US equities may need to overhaul their holdings after several multi-managers have warned the dynamics driving the market could be on the cusp of switching.
Companies defined as value stocks have underperformed their growth rivals – particularly in the US – since the financial crisis but many think this could be about to change.
The Russell 2000 Value index, which is comprised of US small- and mid-cap stocks judged to have value characteristics, has underperformed the Russell 2000 Growth index by 34.3 percentage points in the past five years.
John Ventre, head of multi-manager at Old Mutual Global Investors, said the pattern of growth outperforming value had been mirrored in other equity markets, but he thought it was now at a turning point.
The manager of Old Mutual’s Spectrum and Generation fund ranges said he had been running a growth bias across his portfolios for the past few years, but he was now “working to reposition towards value”.
He has already shifted his emerging market exposure from growth to value and is in the process of doing so for the US.
Mr Ventre said a large part of the outperformance from growth had come from the technology and biotech sectors, two of the major outperformers of recent years.
He explained the era of low interest rates had boosted growth companies because they were judged on long-term measures of growing cashflow and profitability, which became much higher when long-term interest rates were low.
So when interest rates increase it could signal a sea change in this view, lowering the expected long-term profitability of growth companies and causing investors to look once more at value stocks.
Joe Le Jehan, who manages the Schroder Diversity fund of funds range with Marcus Brookes and Robin McDonald, said while his US exposure was a tracker fund, he was waiting for a pullback in the market before ploughing into a value-focused US equity fund.
He said a big part of the value index underperformance had been due to the performance of financial stocks, but he claimed the sector could outperform when interest rates increased.
Mr Ventre said academic studies suggested value outperformed growth in the long term, so its lengthy recent underperformance had made him “nervous”.
Other fund-of-funds managers are tweaking their portfolios to give more money to managers running funds on a value style.
Ben Seager-Scott, director of investment strategy at Tilney Bestinvest, said the firm had implemented a “staged shift from growth-orientated to value” in the past few months.
He has also invested in the Dodge & Cox Worldwide US Stocks fund and the Invesco PowerShares FTSE RAFI US 1000 Ucits ETF.
F&C Investments’ Gary Potter said he was reducing the growth tilt that he has had on his portfolio for some time, while Rathbones’ David Coombs said he was using the profits gained on his growth funds to top up his value managers.
However, both Mr Coombs and Mr Potter said their long-term strategic view was to have an overweight position towards growth styles rather than value.
They added that the recent switches towards value were tactical moves based on the extensive recent outperformance of growth.
Chatfeild-Roberts to stick with ‘value standpoint’ call
In spite of the style’s underperformance in recent years, the Jupiter Merlin fund of funds team has stuck with its value bias.
Manager John Chatfeild-Roberts said the US exposure on the Merlin range was through the M&G North American Value, Jupiter North American Income and Findlay Park American funds, which he said were all “run from a value standpoint”.
However, none of the three funds have beaten the S&P 500 or Russell 2000 indices in the past five years, data from FE Analytics shows.
But Mr Chatfeild-Roberts stuck by the call and said: “In the long term, we prefer to have greater exposure to the value [style], the Warren Buffett end of the spectrum.
“We think that looking at the downside risk of an investment is as important as assessing the upside potential. As Einstein once said, compound interest is the eighth wonder of the world.”
