Jupiter's Merlin: Value trade could be 'dead in the water'

Jupiter's Merlin: Value trade could be 'dead in the water'

Jupiter's John Chatfeild-Roberts has added his voice to doubts over the sustainability of the 'value trade' warning it could be "dead in the water" if US Treasury yields' failure to rise further continues.

Mr Chatfeild-Roberts (pictured), who heads up the team running the fund house's £7.5bn Merlin multi-manager range, noted that while prices on value stocks still had room for manoeuvre, further gains were heavily reliant on risk appetite increasing again.

When asked whether the value trade could continue, he said: "It's [the] million dollar question, largely driven by the behaviour of the long bond [10-year Treasury] in America.

"Today it [the yield] is 2.33 per cent. People have been talking about it going out to 3 per cent. If it stays at 2.3 per cent or lower, the value trade is dead in the water."

Yields have struggled to gain momentum in recent weeks despite the prospect of further rate rises and inflation in the US this year. The 10-year Treasury yield approached 2.6 per cent in mid-March but has gradually been trending lower since.

Higher yields are an important indicator of broader market behaviour. Should they rise on government debt, traditionally a safe haven for investors, this reflects a greater appetite for risk which proves favourable for cyclical stocks.

The team has backed some managers whose funds would benefit from increased momentum behind value names, including Jupiter's own value specialist Ben Whitmore.

However the Merlin portfolios also include quality-focused managers such as Terry Smith and the Evenlode Income team, and are not aggressively positioned to benefit from a value trade, Mr Chatfeild-Roberts said.

"It [the value trade] has certainly stalled but there's a lot of catch up to happen. We have moved our portfolios a little but not gone the whole hog," he explained.

The much-heralded shift from growth to value proved decisive for a number of managers last year, as changing inflation expectations boosted beaten-up sectors such as mining and banks.

Value indices, which track out-of-favour stocks, significantly outperformed growth counterparts for the first time in a decade over 2016, with the MSCI World Value index rising 34 per cent compared with 23 per cent for the Growth metric.

However as Investment Adviser has reported, the first quarter of this year has showed signs of a reversion to post-crisis norms.

Given the current uncertainty, the Merlin team has maintained a number of potentially defensive positions, including exposure to gold which was upped last year.

"We have got some gold as a hedge, because we do remain in uncharted territory with what central banks are doing," said manager David Lewis. "Gold remains the currency that cannot be printed."

Similarly, in fixed income the team is favouring a focus on credit, with short duration.

"To access that we have been focusing on more flexible and strategic and dynamic bond funds," said Mr Lewis.