FTAdviser.com

Advertising

The most interesting phenomenon in the investment universe in Europe over the course of the past year has been the dramatic outperformance of growth investing compared with value styles. It is the first time this has happened in five years and has propelled growth managers to the top of the peer group table, while value managers – who have tended towards the top of the group in previous years – are really struggling.

However, all is not lost for those managers wedded to a value outlook. Commentators now suggest growth is riding at too high a premium and is, put simply, getting too expensive.

Nick Sheridan, manager of the New Star European Value fund, which has lost 1.2 per cent on a cumulative basis over one year, compared with a gain of 1.1 per cent for the sector according to Morningstar, believes the time is approaching for there to be a wholesale move back towards value.

“Growth stocks in Europe were trading on a 40 per cent premium to value in April. This compares with a 20-year average premium of 30 per cent. Likewise, value stocks have been de-rated and the spread in price/earnings multiples across the market has widened, with value stocks ending May trading at half the p/e multiple of growth stocks,” he says.

The timing also seems to be right for a move back into financials, with many funds now having a substantial weighting in this industry sector. According to Morningstar, 14 funds in the sector have more than 30 per cent of their portfolios in financial services, with many more having between 20-30 per cent dedicated to this area.

Several funds suffered at the back end of 2007 from moving back into financials too soon, getting stung again in November when these stocks proved they had further to fall. However, the investment case is becoming more compelling again, with many institutions having been upfront about the losses experienced due to sub-prime contagion.

While in Europe ex UK large-cap growth has been king, in next week’s Analyst we will be focusing on the European Smaller Companies sector, where both liquidity and expectations have had to be managed and performance has been harder to generate.