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 8 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 trustnet.com trustnet.com 9