The decline of value

There was a philosophical tension between two of them. The one was happy buying a great company at a fair price and the other thought it was far better to do the opposite and own a fair company at a great price. 

The one owned ‘safer’ companies like Visa, Amazon and Microsoft, and the other more ‘distressed’ companies such as Anglo American, Natwest and Lukoil.  You would neatly categorise the latter as value and the former as growth/quality.

I asked the manager of the ‘growth’ strategy why he ran money in that way and his answer stuck with me. Besides believing it was sensible, he looked at the value manager and said: “It is just easier.”

He was right; many a career has been cut short by being a value investor. It is far more comfortable owning popular names with secure earnings growth than the value names, often with bad news headlines, riskier business models, even if their prices are depressed.

There is also a feast-or-famine pattern to value investing. It gives you nothing for ages, then usually pays you out multiples, at times of market stress.

In fact, the last time value investing did fantastically was in 2009, when equities rerated meaningfully and value stocks rallied. That means 11-plus years of quite barren returns and counting.

And it has finally come at the cost of a few careers. Within the UK value space we are seeing some of the most experienced managers either leave their employment or get shifted away from lead manager roles. Below is a table explaining this.

Source: Fundhouse

We appreciate that the explanations for each person’s departure or role change may differ, and that not every manager on the list was necessarily fired or has had an end to their career.

But, purely looking at this data, you find five well-established UK equity multi-cap managers that are no longer running their flagship open-ended funds, following periods of poor performance. And they are all contrarians, with a value approach.

They have also seen a few things. Each has been through multiple crises since the 1990s and, up until the last few years, had a good long-term track record. The average experience lost is over 30 years, too. 

Even more recently, another UK value manager – Richard Buxton – became a casualty on the Jupiter UK Growth trust, after it was decided to close the trust. 

Granted it was small and he had only recently been appointed, but it seemed the stakeholders felt it was too difficult to turn it around.

What do we make of these people moves? We acknowledge that changes of portfolio manager happen for all sorts of reasons. But the number of value managers finding themselves on the sidelines is mounting. It tells us a few things, probably. First is that the businesses employing these managers may have run out of patience.

The shareholders rely on growth in assets, and growth in assets relies on performance. This may well end up being an example of where the imperative of the shareholder (near-term profits) pulls against the interests of investment teams and clients, possibly making changes at the wrong time. Time will tell. 

Second is that clients have lost patience for similar reasons – many hung in during the depths of underperformance, but waiting 11 years was just too much for them. In all instances, the fund sizes have dramatically fallen over the years, suggesting clients have voted with their feet.

But, finally, it may hint at something positive. If we go back to the late 1990s, we saw a similar trend with value managers struggling with performance and outflows. Eventually some experienced managers left, too. A good example is the late and very gifted Jim Cox, from Schroders, who left in 1999-2000. And as he stepped back, performance started turning.

Could we be witnessing such a moment, where history finds that the final sacrifice of a number of long-standing careers may be a signal that this was a great buying opportunity?

Rory Maguire is managing director of Fundhouse