Tightening economic policy from central banks could see 2019's “hero funds” struggle, a fund manager has claimed.
Charlie Parker, managing director at Albemarle Street Partners, said advisers should be prepared for rising interest rates, even though it might not look likely at the moment.
He said that if rates did rise, the industry would expect the outperformance of growth funds to recede, alongside the “hero funds” associated with this style.
Both Terry Smith, who manages the Fundsmith Equity fund, and Nick Train, who runs the Lindsell Train UK Equity fund, favour the 'quality growth' style of investing which has been in favour with investors for most of the decade since the financial crisis.
This is because the quality growth style of investing performs best when interest rates are low and bond yields are low.
But if the central banks tighten their economic policy by raising interest rates, value stocks are more likely to overperform as more companies should be growing, making the price paid for the growth more important.
Mr Parker said: “In the place [of growth funds], the new heroes would be value investors. There are some early signs this could be the case in recent months with the long yield rising despite the latest round of central bank easing.
“This has caused a resurgence in value funds and led many to begin selling down their quality growth holdings. Should this prove the long-term case it will require a significant re-allocation of capital across UK advisory and discretionary portfolios.
“Judging this right is likely to prove the key determinant of performance for the next decade.”
Rising interest rates are a sign the economy is doing better — the economic state in which value funds tend to thrive - and Mr Parker said there were several reasons why central banks could raise interest rates in 2020.
Firstly Mr Parker thought there could be a resolution of the trade wars initiated by US president Donald Trump should he be able to claim he has ‘won’ the war.
He said: “If he seals his much-sought deals with China and others he may well claim victory and remove the tariffs which are affecting manufacturing-led economies.”
Mr Parker also thought the UK could see a “renewed fiscal stimulus” which could boost consumer spending and power-charge the economy.
He said: “Perhaps more significantly than Trump, it is notable that [the Conservatives] stood on a platform of increased spending. This could boost consumer spending and weaken the dollar.”
Mr Parker added that for this trend to become “truly global” greater stimulus within the reluctant Eurozone was needed but it was likely we would see “some movement” in this direction.
Mr Smith, chief executive and chief investment officer of Fundsmith: “Markets are second order systems. So in order to successfully make use of predictions you need not only to be able to predict the course of events, like interest rates, but also know what the market is expecting so that you can gauge how it will react."
He said such an approach was "doomed [for] failure" and that he could trace back "some seven years" of people warning the shares of quality growth stocks would underperform.
Mr Smith added: "During that time the Fundsmith Equity fund has risen in value by more than 330 per cent and outperformed every year.
"So-called 'value' stocks will eventually enjoy their day in the sun, but even successfully capturing that will never compensate for missing out on the compounding returns of quality company stocks [over the past decade]."
Lindsell Train did not comment.
imogen.tew@ft.com
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