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Paradoxically, the ever-widening performance gap between growth and value has been one of the only things giving succour to value investors over the past few years. The argument has its obvious attractions: the worse things get, the closer we must be to a renaissance. Sadly for the contrarians, it’s a case that struggles under closer scrutiny.
To find out why, head back to the Credit Suisse Global Investment Returns Yearbook, into which we first delved earlier this week. It notes that value’s recent run of underperformance versus growth has proved the deepest and longest since 1960. But the bank’s analysts have bad news for the value stalwarts: they suggest that the performance gap (what it dubs the “value stretch”) doesn’t foretell an immediate comeback for today’s beaten-up stocks:
To examine whether value stretch can be used to time the value factor, we regressed the future value premium on the prior level of stretch. Unfortunately, we found no relationship. No doubt, the value factor will reassert itself at some stage, but our research based on value stretch does not help us predict when.
This may once again be a case of wait and see. That chimes with discretionaries’ own thinking: our analysis shows that DFMs have been merely dipping a toe into the water when it comes to value exposure, rather than diving in.
The shift to centralised decision-making may also have had an impact: recent research from the Platforum, which admittedly focused squarely on the adviser world, suggests the rise of committee-led decision making means intermediaries can be slow to adapt their investment styles. Wealth managers will hope they can be a little more proactive when they adjudge the time has finally come.
Time and time again
To caveat our final lines above, it’s best to remember the old saw: time in the market is more important than…timing the market. But what sort of holding period do DFMs recommend for their own model portfolios?
For a sense of what wealth firms are thinking on this front, we’ve looked at more than 50 Balanced portfolios covered by our MPS tracker to see what time horizons they reference.
As with portfolio labels, DFMs do tend to be fairly consistent, though in this case consistency doesn’t equate to transparency. Some 37 per cent of portfolios don’t refer to any timeframe on their factsheets. The same proportion make a broad reference to their models being suitable for long, or longer-term investment:
Of those that do state something more specific, an overwhelming majority look at a period of five years or longer. Only two firms give a minimum timeframe of three years – and one of these caveats that a five to 10-year view would be more suitable for investors.
That’s reasonable enough, given active investors with a Balanced remit can't be expected to deliver results overnight.
But it does come into conflict with some of the commercial pressures unique to DFMs. Their growing band of adviser clients are much more clued up than the average retail investor - and while advisers are also more conscious of the need for long-term time horizons, they want to feel they’re getting their money’s worth.
That often translates into an implicit demand for discretionaries to get ahead of the curve. Perfecting the combination of tactical and strategic asset allocation, in a way that both keeps clients happy and ensures optimum results over the long-term, remains the hardest part of the job.
As it stands, it’s hard to find much to be tactical or nimble about at all. The volatility spike that made Q4 a commentator’s delight but an investor’s nightmare has faded away, and markets have returned to the relative serenity that’s characterised much of the past decade.
Of course, long-only fund managers say they welcome volatility, as it gives them the chance to reinvest at lower prices. And buying the dip once again looks to have been an effective strategy at the end of last year.
But for those with more of a macro focus, it’s back to the puzzles of peacetime.
The FT reports that these managers are simply “finding other things to do” in the absence of market ruptures. That seems to constitute either relative value trades, or simply taking advantage of the rally in China A-Shares. When it comes to the latter, macro managers bemoaning a lack of volatility should probably be careful what they wish for.