MULTI ASSEST PROCESS
Time to re-board the value train?
Fund Managers: John Husselbee & Paul Kim
This piece originally appeared on FT Adviser at https://www.ftadviser.com/investments/2018/01/16/husselbee-time-to-re-board-the-value-train.
A key part of our multi-asset investment strategy is looking to buy favoured areas when they are cheap and we have added exposure to value stocks this year, where performance remains far removed from surging growth companies. We see this as a broad trend, most obvious in the US, but also prevalent across Europe, Japan and emerging markets.
Value investing has a long-term track record – championed by the likes of Warren Buffett – but followers of this strategy have suffered a lost decade since the end of the financial crisis, the longest sustained stretch of underperformance since the Great Depression.
By its contrarian nature, value often endures periods in the wilderness but the recent malaise compared to growth names (encapsulated by the FANG stocks – Facebook, Amazon, Netflix and Google) has been so prolonged that Goldman Sachs research last year debated whether value investing is dead.
The investment bank concluded it is too early to give up on value and current ‘unfriendly conditions are unlikely to persist. But as many commentators, including us, were also talking up the opportunity at the start of 2017, investors can justifiably ask what is different now.
We would point to several interconnected signals why 2018 may be a good time to increase exposure to this cheaper end of the market and have added funds such as Fidelity Special Situations, JP Morgan US Equity Income and Schroder Asian Income to our portfolios.
Strong performance from growth stocks since the financial crisis is understandable, with investors willing to pay up for companies able to outgrow a sluggish global economy. According to Goldmans, ongoing ‘secular stagnation’ has clearly inspired investors to favour stocks capable of generating their own growth over value names.
That has supported the FANGs and many others whereas financial companies – a bastion of value as much as technology is of growth – have spent the last decade weighed down by ever-increasing regulation.
Particularly in the US, the gap between growth and value has reached historic levels and we see a solid case for this starting to unwind in the shape of President Trump’s tax cuts. Wherever you stand on these politically, consensus suggests the positives for corporations and individuals could boost many sectors of the economy in 2018 and if Trump continues his deregulation plans, financials are an obvious beneficiary.
In contrast, value began to rally in 2016 and into 2017 after central banks looked to be stepping away from austerity, realising monetary stimulus had reached the end of the road and governments needed to dig into their own pockets to stimulate economic growth. This recovery faltered however as Trump’s policy initiatives – including healthcare reform – stalled and little progress was apparent in areas such as infrastructure.
Value stocks tend to outperform when an expansion is broad-based and relatively robust – generally at the start of an economic cycle – and there are signs we may be coming out of the sluggish growth of recent years. We are currently in a rare period of synchronised global growth, with two thirds of the countries tracked by the Organisation for Economic Co-operation and Development (OECD) accelerating from 2016.
Something else to bear in mind is that the high-flying FANG stocks have posted earnings that do not necessarily match their expensive valuations and at some point, investors will want to see a closer relationship between the two. Whispers of another tech bubble remain muted for now but in an environment where earnings matter more than future prospects, value names come to the fore.
A final driver for value is the downside protection these fundamentally cheap stocks can offer after a decade out of favour.
While no one is ever keen for a downturn, we had long been surprised not to see a moderate correction in markets, so the events of early February actually came as something of a relief. Commenting at the time of the correction, we echoed our long-held view that this was long expected, is unlikely to mark the start of a recession and should present opportunities for patient investors. If we see further corrections in the months ahead, growth stocks would be expected to bear the brunt of any sell-offs so we will wait to see how things play out.