For an extended period value strategies have been pummelled where it hurts – performance data and outflows. But have nervous investors created a market where defensive growth strategies are expensive and value represents a comparative bargain?
The average return of value funds in the IA Global sector was -1 per cent over the past year compared to 4.35 per cent for the average of growth funds in the sector, according to data from FE. In the past five years, 2012 was the only time value performance pipped growth in the Global sector, returning 11.4 per cent compared to growth’s 11.17 per cent.
Schroders Recovery Fund co-manager Kevin Murphy describes 2015 as a “very bad year” both for the fund and for value strategies generally. On the upside, says Murphy, value stocks are cheaper today, while more stable stocks are more expensive.
Whether this is enough to spark the start of a trend reversal is difficult to say, according to Andrew Johnston, senior investment research analyst at Square Mile. “Given the recent performance dispersion between these two styles value should clearly be an area of consideration,” he says.
“We would say that clearly growth, and defensive growth at that, has been very much in vogue in recent years, with investors appearing happy to pay up for reliability in a low growth world. However, we have seen some value areas, especially mining, finally having a better time of it this year.”
Data compiled by Schroders comparing the return of the MSCI World Value Index and the MSCI World Growth Index shows value has underperformed for the longest period in history, and Schroders says the scale of value’s weakness suggests its recovery “could be profound”.
Performance of the iShares MSCI World Value Factor Ucits ETF highlights this, returning -3.27 per cent in 2015 compared to 2.48 per cent for the iShares MSCI World Growth Factor Ucits ETF.
Investors have poured out of value strategies. Value funds in the Morningstar US Large-Cap Value Equity and UK Large-Cap Value Equity categories saw outflows in every quarter in 2015, totalling €7.25bn (£5.84bn) and €739m respectively. Meanwhile, the Europe Large-Cap Value Equity sector saw €154m inflows in Q3, following four quarters of outflows totalling €3.75bn. It returned to outflows in Q4 of €161m.
“Investors were quite unnerved by a lot of stocks that have uncertainty and instead ran towards any companies that had consistency in their growth,” says Lucy Walker, fund of funds manager at Sarasin & Partners.
“Even though markets have been pretty strong since the crisis, actually we have had continued uncertainty since then,” Walker says, pointing to the Eurozone crisis, Greece’s sovereign debt crisis and question marks over Federal Reserve policy in the US.
Investors have been turning to growth stocks and strategies as a result, says Walker. “That’s only attractive if you’re not paying a high multiple for those companies, but suddenly today quality is as expensive as its ever been and so actually the companies that are delivering that consistent growth are very expensive.”
Walker says the Sarasin & Partners Global Strategic Growth fund of funds has moved to a tilt towards value. “This fund normally has around 40 per cent in equities, and I would say approximately half the equities are more value driven and that would have been about double what it was two years before.”
The fund initiated a position in Schroders Recovery fund late last year, which Walker places at the “deep end” of the value spectrum. “Long term it had an excellent record, but short term it had been hit. We saw that as an opportunity to initiate a position,” she says. Sarasin & Partners is also invested in US fund Vulcan Value Equity.
Performance in the Schroders’ Recovery fund has indeed been lacklustre, with cumulative performance over the past year of -11.2 per cent compared to -5.5 for the UK All Companies sector. But despite the performance, the fund has had inflows in the year to date, says Murphy, and returns are looking up. For the past three months the fund has returned 7 per cent compared to 1.9 per cent for the UK All Companies sector.
Murphy says trying to predict if value strategies will increase in popularity in 2016 is “effectively a beauty contest” and difficult to judge. “What I can say is they are due a rebound in performance at some point over the next three to five years,” he says.
So what areas of the market are capturing value investors’ interest? “From a geographic basis emerging markets are the cheapest,” Murphy says. In the UK market, Murphy says the fund turns to the most uncertain and unpredictable sectors, such as banks, mining companies and food and drug retailers.
“Of those in particular, we would say banks are the most attractive risk-reward candidates in the UK market,” Murphy says. That includes the three domestic names – Lloyds, RBS and Barclays – with HSBC and Standard Chartered more recently added to the mix due to the fall in emerging markets. In the US, Murphy says “old-fashioned” technology such as Cisco and Intel are cheap.
And what are the expensive stocks that Murphy is avoiding? “Companies where people think the outlook is more certain, like consumer goods companies. They’re not bad businesses they’re just very, very expensive. Whilst traditionally some people saw them as value stocks, today they aren’t,” he says.
However, not everyone thinks value is primed for a comeback. Multi-manager Architas is tilted towards growth and has increased its exposure further in the past year.
“Yes growth looks expensive and some of these companies are trading on price-to-earning multiples that look stressed,” says senior investment manager Nathan Sweeney. “But if you put your money in the bank you get zero, whereas in a good growth company you can get 4 or 5 per cent.”
Square Mile’s Johnston says it is noteworthy that several “classically defensive” sectors, such as tobacco and utilities, have had a reasonably good start to the year.
However, Sweeney doesn’t think value is dead. “There may be a more value tilt in different stock markets,” Sweeney adds. “I’m of the view that in Asia people have punished the market, with many good reasons, but I think the market has oversold.”
At Lipper head of UK and Ireland research Jake Moeller says with people already rotating into value stocks “it’s very important to have a good active fund manager who’s still able to pick up the bargains”.
Certainly, taking a contrarian view like value does require some nerve, particularly during periods like last year, says Murphy. “Emotionally it’s not great underperforming,” he admits, but says he communicates with clients on what to expect “warts and all”.
“They should expect us to underperform one year in every three, over time they should expect performance of at least 2 per cent above the benchmark net of fees, and indeed that is exactly what our clients have got over the past 10 years, so when we have a stumble like we did over 2015, we can explain it.”