Value investing based on simply choosing companies that are cheap is “dead”, according to Peter Hargreaves, who has bet that much of the “old economy” hurt by the pandemic will not return to prior highs.
In a note to investors published today (January 19), the Hargreaves Lansdown founder said throughout the coronavirus crisis, the “old economy of stale cyclicals and cheap ‘value’ plays” had suffered.
Instead, the market had seen the “quality of global leviathans” — such as Microsoft and Amazon, whose share prices are up 30 and 60 per cent respectively over the past year — shine through.
Mr Hargreaves said: “I am … amazed at the many professional fund managers who still act as though the world hasn’t changed.
“They cling to the hope that the companies and industries exposed to secular decline will ‘come back’.
“I shall be bold here and make a prediction for 2021 — much of the ‘old economy’ will not return to prior highs, and value investing based on simply choosing companies that are ‘cheap’ is dead.”
Value stocks, with low price tags, typically perform well in market downturns but the coronavirus crisis has seen quality growth stocks, such as US tech companies, outperform.
Proponents of value investing argue that ‘value’ stocks are currently undervalued and will be the companies most likely to benefit from any global economic recovery.
But Mr Hargreaves said stocks such as Microsoft and Amazon had only improved their dominance throughout 2020, being at the forefront of changing commerce and providing “much needed” new-age business and communications software.
Mr Hargreaves’s own fund house, Blue Whale, and its flagship fund has performed well amid the crisis, in part due to its exposure to quality growth technology stocks.
The fund returned 26 per cent in 2020, compared to its peers in the IA Global sector which returned an average of 15 per cent, an achievement Mr Hargreaves put down to a “focus on quality companies that strive in the new economy”.
As of the end of December, the Blue Whale Growth Fund’s top 10 holdings included Adobe, Facebook, Mastercard, PayPal and Microsoft, with nearly 60 per cent of the fund invested in technology stocks.
According to Mr Hargreaves, lead manager Stephen Yiu had liquidity set aside in the fund at the time of the March sell-off, after being selective in his investments and taking profit when valuations looked stretched towards the end of 2019.
Mr Hargreaves said: “This war chest proved useful as many of his favourite companies fell to bargain basement valuations following the indiscriminate sell off as early news of the pandemic proliferated.
“Deploying cash when others were selling in a panic requires conviction, and I am glad that Stephen and his team had the courage to do so.”
Last summer, Mr Yiu said he backed ecommerce companies, firms involved in digital transformation and “pent up” businesses as the stocks in line to benefit from the Covid crisis.
Hr Hargreaves said the team at Blue Whale was intent on investing in “the most beautiful companies” with the aim of continuing to deliver consistent significant outperformance.