UK Value funds have had their third worst month of performance relative to growth funds in twenty years, data from Schroders has shown.
The data suggests the rally value funds enjoyed in the Autumn of 2019 has firmly petered out, leading Nick Kirrage, co-head of the global value team at Schroders, to admit it is a “hard choice to buy a value fund today”.
He said: “There are potentially big rewards. It won’t be easy but life is not like that. It will change, and value will outperform. But it is difficult to say what the catalyst for the change will be.”
This is because in that environment investors focus less on the growth rates of a company, because almost all companies are growing, and instead focus on the valuation of the company.
When economic growth is weak, and few companies are growing their business, investors tend to focus on the companies that are growing, and so pay less attention to the valuation.
James Anderson, who runs the £9.9bn Scottish Mortgage investment trust, which is a growth fund, believes many of the factors which caused value investing to outperform in previous decades no longer exist.
He believes the companies that growth investors have been buying, including technology companies, are effectively replacing many of the companies on the stock market that investors would usually regard as value stocks in the current climate.
But Mr Kirrage said value funds don’t just buy those companies that have fallen the most in value, describing this as a “misconception.”
Justin Oliver, deputy chief investment officer at Canaccord Genuity Wealth Management, said: “Growth and value may be viewed as opposite sides of the same coin.
"However, we believe it is important to understand that there have been other characteristics which have played their part; in particular the style factors of quality and momentum have also been an extremely important determinant of investment returns.
"Value stocks as a whole stand a good chance of leading the way during 2020 and we do not intend to be underweight this style factor during the year ahead. However, we also believe it is important to combine exposure to different factors, rather than becoming overly reliant on one single characteristic."
Over the past few years, value stocks have consistently underperformed growth, quality and momentum factors, although it was noticeable that during 2019 a rotation into value from growth took hold.
Mr Oliver also said while value in the UK continued to outperform for the remainder of the year, the rotation in the US was relatively short-lived and growth and value performed broadly on a par from the end of August.
Ben Willis, who runs the model portfolio service at advice firm Chase De Vere, said: “Value investing is a legitimate and tested method of investing in stock markets but appears to have been a victim of unprecedented central bank loose monetary policy, and the low inflation and low growth environment that we have faced.
"Although there have been several false dawns for value investing in the past few years, we still believe that this method of investing can return to favour again. However, we cannot predict when and we cannot clearly identify what the catalyst will be.
"It is important to be diversified when allocating to equities, so we are comfortable allocating a portion of a portfolio to value funds as they can provide periods of gains when growth falters and vice versa.”
david.thorpe@ft.com
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