Equally, it doesn’t mean that our fund managers sell a stock because of a fixation on value or a narrow definition of what value means – or, more accurately, used to mean. Some are comfortable holding stocks such as Amazon and will continue to do so. Others who have profited from the tech rally are now considering a rotation to cyclicals because their prices are relatively attractive. A value play? Not in simple terms.
Bears or elephants?
But are we in the weeds here? Are we focusing too much on a fundamentals-based argument when central banks have distorted the market? If price discovery was more difficult in the past decade because of quantitative easing, what about now with even vaster support from central banks? Low interest rates have in some cases distorted discounted cashflow models and made growth companies more attractive. The ‘whatever it takes’ scale of interventions by central banks have arguably stopped a potential rotation away from richly-valued stocks. And the yield curve is being kept flat for the foreseeable future, which neuters the argument that a rising yield curve would imply economic growth and so a more favourable environment for value stocks.
History, causality and corollary
It’s important to separate correlations from causality. Some value stocks will have a closer correlation to bond yields and the economic cycle, with financials and commodities two obvious examples. But data going back over 100 years shows value strategies delivering strong performance across different environments. Even looking back to the post-dotcom environment – in which there was recession; steep cuts in interest rates; the revelation of large-scale fraud; and the invasion of Iraq – value stocks entered into a substantial rally.
It’s also important to separate value stocks from the valuation-driven ethos of most fund managers. Our fund managers will continue to seek out stocks with attractive valuations and potential growth. A number of these will happen to fall in the ‘value’ categorisation. But each will have been selected on the company’s individual merits and prospects. The many nuances within value and growth mean that there are ample opportunities to grow both dividends and earnings – and to potentially satisfy ‘growth’ and ‘value’ investors alike.
Visit the Artemis website for more information and for further investment insights.
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