Value  

Seeing the value in value stocks

Seeing the value in value stocks

The past decade has been characterised by the haves and have nots in the investment world. 

The past decade has been characterised by the haves and have nots in the investment world. 

We have had our own version of austerity, with value managers having their handouts reduced and growth managers lording it over them, taking the lion’s share of assets and fees.

In a decade Terry Smith has gone from zero to more than £18bn with the eponymous Fundsmith Equity fund, irritating a few incumbents in the industry along the way. 

Has the tide turned? Is value about to make a stunning comeback? Or are growth investors going to have to become more discerning and have to question price more when investing?

Portfolios comprised of only growth in the last decade have massively outperformed value; this is highlighted in the US stock market where the Russell 1000 Growth index has returned 285 per cent (in US dollars) versus 178 per cent for the Value index.

But how many investors have purely been in growth funds for that period? And if you have been, do you sleep well at night given valuations of some growth stocks?

My view on portfolio construction is that you need a balanced approach to manage risk.

Yes you can tilt the portfolio in certain ways, but you should very rarely exclude any region or style completely.

In other words, even though it has been a growth market for a long time, I am happy to have owned value.

The one caveat is that I want the best value managers to sit alongside the best growth managers; pairing a newer nimble fund such as BlueWhale Growth with Schroder Global Recovery, for example.

So growth has been the place to be invested for the past decade, but what of the future?

Market comparison

The graph above is interesting as it shows two value-focused funds compared to one growth fund: Man GLG Japan Core Alpha and Vanguard Developed Europe ex-UK equity relative to the growth of Baillie Gifford American. 

Turning to the European first, and over the past year it has traded closely to the S&P, with a decent outperformance spike in recent months.

Compare this with most of the past decade and it shows why there are signs of encouragement.

However, the context of negative rates, quantitative easing and a German economy that narrowly avoided recession needs to be mentioned to temper the optimism slightly.

But investors know this and still the market has performed pretty well.

Key Points

  • Growth managers have done very well over the past 10 years.
  • Certainty will soon be less fashionable.
  • Rate rises are not expected to be on the cards.

The Japanese fund is a slightly different story, largely as it has seemingly been in decline for 30 years. 

According to Reiko Mito, GAM Star Japan Leaders’ manager, Japan’s profits have been world-beating. Corporate Japan has seen 10 per cent earnings per share growth a year over the past three years.