Schroders: Value rally: has the ship sailed?

In 2016, however, the tide began to turn, shown on the right-hand side of the chart below. The MSCI World Value Index rose 12.3% over the calendar year in dollar terms compared to 2.8% for the MSCI World Growth Index.

Value investing is a long-term investing approach which focuses on exploiting swings in stockmarket sentiment, targeting companies which are valued at less than their true worth and waiting for a correction. Growth investing, in contrast, focuses on capital appreciation, investing in companies that exhibit signs of above-average growth, even if the share price appears expensive.

As value shares bounced back at the tail-end of 2016, with prospects for the economy improving, lower quality, cheap companies from sectors such as financials and commodities stormed ahead.

But then the tide turned again this year, with the growth index returning 8.0% year-to-date compared to 3.7% from the value index, according to Bloomberg data as at 28th March 2017.

Does this mean investors are now too late to get on-board with value?

Marcus Brookes, Head of Multi-Manager:
“The idea that value can only outperform for six months and that’s it, can only be true if you believe the economic cycle is coming to a jarring end. I don’t see any evidence of that for the time being.”

Nick Kirrage, Fund Manager, Equity Value:
“The style debate will come to the fore again over the next three to five years. Diversification of style is going to be absolutely essential. Value versus growth hasn’t mattered for a long time, as value has been through a period where it has underperformed quite substantially.

“Because it’s been so poor, everyone moved towards more growth-orientated strategies. This was clear last year when we saw six strong months for value and 85% of fund managers underperformed. This is an amazing trend, because people with two or three different funds in their portfolios have realised they have diversification of fund manager, of fund house, of stocks, but no diversification of style. They all bought the same type of stocks.

“The good news is that it’s not clear the value rally is over at all. If you look back over the last 30-40 years, last year was just a blip in the correction between growth and value. We’re at levels of relative underperformance between value and growth that are worse than during the tech boom. Even despite the rally.

“You don’t have to time it, if you can invest for five years plus. It’s a trade where, despite seeing some good performance over the second half of last year, I would be staggered if this is the end of it over the next five or ten years.”

James Sym, Fund Manager, European Equities:
“I have a slightly more nuanced opinion. If you look at banks for example - a classic value sector - the rally has brought them back on current earnings to roughly fair value. For that value style to continue to perform you need the fundamentals of those companies to do better, i.e. their earnings to grow more quickly than the market. That will only happen if inflation continues to come back and continues to rise. Personally I think that could be a pretty good bet to make. Partly because the starting point is very low, with bund yields [German government bonds] still less than 1%. So I think the value debate is more nuanced than it was at the end of last year.

“However, it’s pretty evident in Europe that there has been a one way bet of being very underweight lower quality cheaper companies, and very overweight good companies that let you sleep well at night. Lots of funds have benefited hugely from that. These have become crowded trades because it’s where clients have put all their money and it could be very painful for some investors when the tide turns.”

Martin Skanberg, Fund Manager, European Equities:
“Overall, we feel it is not yet the moment to call time on the value trade. The macroeconomic environment looks supportive for value and higher risk stocks with rising inflation expectations around the world. This is good for corporates as it enables companies to raise prices, after years when prices were under pressure.

“However, some caution is warranted. There is a danger of economic optimism becoming a consensus view, leading to a risk of disappointment if the data fails to carry on improving.

“We must be mindful too of the risks around the eurozone’s upcoming elections. Indeed, we would have higher confidence in the continued longevity of the value rally in Europe if we could be sure of the outcomes of these.”

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