Trustnet Magazine Issue 37 February 2018 | Page 10

YOUR PORTFOLIO
THE VALUE TRADE
PRICE
AND PREJUDICE
Cherry Reynard says there are signs the out-of-favour
value strategy could be coming back into fashion
T
t has been an
uncomfortable time to
be a value manager
and even the most
ardent followers of the
discipline may be wondering
whether it has had its day. After
almost a decade when the value
style has lagged its peers, is it time
to admit defeat? Or could it be that
the underperformance is simply
down to monetary policy and the
scales will start to tip back now
that interest rates are rising?
Over the last 10 years, the MSCI
World Value index has delivered
a total return 125.26 per cent,
compared with 183.56 per cent
from the equivalent growth index.
Against an uncertain economic
backdrop, investors have favoured
reliable growth with little concern
for how much they paid for it.
Few were willing to take a risk on
unloved “value” names, such as
banks or mining companies.
PROXIES
Certainly, the monetary
policy environment has been
contributory. Falling interest rates
and the resulting low bond yields
have made bond proxy sectors
attractive. This has driven the
performance of companies that
delivered dependable earnings
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growth when it was hard to come
by in most other areas of the
market. At the same time, banks
and mining companies have
appeared too precarious for most
investors’ tastes.
The question then, with many
of the factors that have driven the
outperformance of growth styles
reversing, is whether this will
change as the environment does?
The US 10-year treasury yield, for
example, is now edging towards 3
per cent, having been as low as 2
per cent in September 2017. This
means risk-averse investors no
longer have to look to the equity
market for income. Estimates suggest that the
consumer discretionary sector
is now trading at a discount
of around 25 per cent relative
to industrials, yet there is no
meaningful difference in earnings
growth or future prospects.
Value has started to fare better
since the start of 2018, but Stephen
Peters, portfolio manager at
Barclays Wealth and Investment
Management, points out that
January 2017 saw a similar trend
before growth reasserted itself.
At the same time, markets have
shown that they can be insensitive
to valuations for extended periods.
FAVOURABLE CONDITIONS Nevertheless, asset allocators are
starting to adjust their portfolios
and there is a recognition the
environment may have finally
turned. James Klempster, head
of portfolio management at
Momentum Global Investment
Management, says he normally
maintains a balance between
equity and growth styles in
his portfolios, but is starting
to tilt them towards value:
“Growth has been at the fore for
a number of years and has had a
phenomenal time, but is now quite
concentrated and value has been
left behind – it is bifurcated.”
At the same time, economic
growth is no longer scarce. The
IMF recently upgraded its global
growth forecast to 3.9 per cent,
aided by US tax cuts and a buoyant
Chinese economy. Companies are
generally operating in a favourable
environment, meaning investors
should no longer have to pay
higher prices for growth stocks
when “weaker” companies are also
delivering the goods.
This can be seen in the valuation
differential between sectors
such as consumer discretionary
companies and industrials.
TURNING THE CORNER
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