Advisers are doing their clients no favours by debating whether “value” or “growth” style investing is better for them, according to Nick Train, who runs the £1.4bn Finsbury Growth and Income trust.
Mr Train said choosing between funds that are either value or growth in orientation, depending on the point of the economic cycle, is a “20th century” way of constructing a portfolio as a result of technological change.
In the 21st century the key question for advisers should be whether the fund they buy is full of companies that are likely to be disrupted by technology, he said.
He said the largest stocks on the UK market include banks that are not really growing their earnings and are vulnerable to technological change, yet are regarded as “value” investments, because they should do better when economic growth picks up, but have underperformed in recent years, when economic growth has been weak.
Mr Train said the problem is this ignores the potential for technology to ravage the business models of those companies.
Mr Train’s trust is in the AIC Global Equity Income sector. It has returned 6 per cent this year to 10 July, compared with 2 per cent for the average trust in the AIC UK Equity Income sector in the same time period.
The largest holdings in his funds include companies such as Relx and Unilever, which he said are traditionally viewed by the market as growth stocks, and should perform poorly if the global economy does better, this is because the earnings of companies such as Unilever are regarded as being durable even in down markets.
Mr Train said, in theory, the conditions under which value shares should begin to perform better than growth shares have been present for much of this year, with bond yields rising and sentiment improving about the outlook for global growth.
But he found many value stocks have not performed well, while the growth companies he owns have not done as badly as expected.
He said this is because companies such as Unilever are not at risk from technological disruption, while many of the value shares, in areas such as banking and healthcare, will have their business models ravaged by technology.
He said the market won’t buy many of the stocks regarded as value for this reason, while companies such as Unilever, the shares of which he continues to buy, are relatively immune from technological change, so investors remain happy to buy the shares, and ignore other factors.
Mr Train said: "The twentieth century polarity between 'growth' and 'value', which for a number of last century decades was a helpful descriptor of what was going up or down, as well as when and why, seems to us to be less useful today – how temporarily we don’t know.
"In other words, in 2018 it looks as though working out which companies are advantaged and which challenged by digital disruption may deliver better returns than establishing what is currently 'cheap' or 'dear' or whether macro-economic trends favour 'cyclical value' or 'quality growth'."
Alastair Mundy runs the £1bn Temple Bar investment trust, which is in the same sector as Mr Train’s fund but deploys the value style of investing and has dramatically underperformed Mr Train’s fund in recent years.
He said the time period for value funds to come into focus will be when global interest rates rise, as this will mean companies that perform well now, will underperform.
Paul Stocks, an adviser at Dobson and Hodge in Doncaster, said he rarely tries to judge whether the funds he buys for clients should be focused on growth or value, and said he prefers to trust the fund manager’s judgement.
David.Thorpe@ft.com
