At no point since the dotcom bubble have we seen a rotation towards value similar to that of 2022. Now, with the spread between value and growth becoming narrower, investors are wondering if the time has come for a happy coexistence between the two.
Matt Tillett, manager of the Premier Miton UK Value Opportunities fund, questions whether the two styles are really that different. He reckons Warren Buffett ‘had it right’ when he said 30 years ago that the two approaches are ‘“joined at the hip”’.
Portfolios should be built so that the risk comes mainly from stock specifics, not from the less predictable external factors.
Richard Marwood
Fund manager, Royal London Asset Management
‘“Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous”,’ he quotes.
He points to investors’ predictable tendency to overpay for growth during the good times, but the opposite can also be true.
‘2022 certainly threw up a lot of value opportunities amongst good quality mid-cap growth stocks, especially those exposed to the UK consumer.’
An ‘excellent’ example is kitchen supplier Howdens Joinery, which has continued to grow its market share and profitability. Tillett began purchasing the shares in October after a near 50% fall in price.
‘Despite near-term macro risks, this looked to be well reflected in consensus forecasts,’ he says. ‘Since then, the shares have re-rated somewhat but still trade well below long-run averages.’
Better market breadth
But given such a strong run, is there still value in value? Alex Funk, CIO at Schroder Investment Solutions, points to a valuation gap between growth and value that remains ‘significant’ and wide by historical standards.
Relative valuations still remain high by historical standards
Growth vs Value (global)
.png)
‘Even after 2022, there remains room for convergence,’ he says.
Axa Investment Managers, however, is neutral on value. It doesn’t foresee the macro conditions that fuelled the 2022 value rally – rocketing inflation and rapid interest rate rises – repeating.
Also unlikely to be repeated is the environment of low inflation, low rates and falling bond yields that supported growth stocks between 2017 and 2021, says Newton Investment Management. #
The changed economic environment is likely to lead to investors being more sensitive to valuations while still seeking out opportunities for well-positioned businesses with attractive rates of growth.
Paul Niven
Head of asset allocation, Columbia Threadneedle
‘In essence, we should see better market breadth, which is to be welcomed,’ says Catherine Doyle, investment specialist in its real return team.
The firm shies away from labelling stocks as value or growth – instead classifying holdings as compounders (Microsoft), cyclicals (Shell) and defensives (AstraZeneca).
In the absence of a rising tide to lift all boats, a highly selective approach that focuses on stock fundamentals is needed.
‘Portfolios should be built so that the risk comes mainly from stock specifics, not from the less predictable external factors,’ says Richard Marwood, the Citywire A-rated UK equities fund manager at Royal London Asset Management.
What is also evident from our conversations with investment managers is the importance of quality as a metric in today’s market.
‘Finding the right balance between quality growth metrics and valuation is, more than ever, key,’ says Peter Kraus, manager of the Berenberg European Small Cap fund. ‘Quality has become more important for both value and growth companies.’
Paul Niven, head of asset allocation at Columbia Threadneedle and the Citywire A-rated manager of F&C Investment Trust, substantially reduced exposure to growth stocks from late 2020 and through 2021.
Today, he reckons growth stocks may not yet fully reflect structurally higher interest rates.
‘The changed economic environment is likely to lead to investors being more sensitive to valuations while still seeking out opportunities for well-positioned businesses with attractive rates of growth,’ he says.
‘Growth at a reasonable price, rather than growth at any price, will be the likely result.’
Diversification by factors
Fairview Investing director Ben Yearsley has always recommended blending different investment styles because who knows where the biggest fish are swimming at any given time.
‘Two of the traditional value sectors, oil and banks, are awash with cash,’ he says. ‘At the other end of the scale high growth has fallen but I’m still not sure of the valuation, so quality growth – a notch more towards the centre – is what I’d pair with value.’
As an example, JOHCM UK Dynamic invests in high-quality, unloved stocks, often in out-of-favour areas of the market – notably financials at present – and could be paired with Lindsell Train Global Equity, which focuses on exceptional growth companies with durable competitive advantages.
Legal & General Investment Management (LGIM) looks beyond quality to other factors, such as low volatility and size. The last time value dominated across regions (except for the US) was 2016. But, in both 2016 and 2022, the subsequent leadership of factors varies by regions.
‘2022 has reinforced the importance of diversification by regions, factors and to stay active in that diversification,’ says multi-asset manager Francis Chua, who holds a Ciywire + rating.
LGIM’s multi-asset portfolios currently tilt towards the more defensive factors of quality and low volatility in developed markets and towards value and size in emerging markets, where there is a higher correlation to China’s economic growth.
