After a long period where growth strategies have outperformed value-oriented mandates, a select few have been predicting the latter will soon return to favour.
The MSCI Growth index has beaten the MSCI Value index in every year since 2007 except one – 2016. The rebound of value stocks was fleeting, lasting just two quarters as the synchronised economic growth upswing began.
Pretty much as soon as 2017 hit, growth was back with a vengeance. In fact, Marcus Brookes, head of multi-manager for Schroders, says value’s underperformance relative to growth was worse than it has ever been before. Worse even than in 1999, the middle of the dotcom boom. “Actually, that was a walk in the park compared to what happened in 2017,” Brookes says.
However, Brookes predicts now is definitely the time for value. “If someone asked me today, ‘I want to set up an asset management company, what would be the one things that company has to be?’, I would just say ‘value’ because I think it’s set for the next decade,” the manager of the Schroder Diversity range of fund-of-funds explains.
The reason he is so bullish is because the past decade has seen “an absolute supernova of liquidity”. Central banks have bloated their balance sheets, supressing yields and, consequently, upping investors’ appetite for stocks growing their profits rapidly. Now, growth investors are in the “euphoria” stage of the cycle, where they are starting to ignore valuation.
Now, there’s a different environment coming with a well-signalled period of monetary tightening reversing this. As a result, Brookes reckons “value is the place to be”.
In fact, Brookes notes, some value managers have done well year-to-date, with Nick Kirrage and Kevin Murphy’s Schroder Recovery fund up almost 5%.
Are Growth Investors Euphoric?
Of course, the UK is currently a market where value is working. Elsewhere, notes Caspar Rock, chief investment officer at Cazenove Capital, it isn’t. “The point is that it’s quite market-specific where value is working and where it’s not. Value managers are not doing well in the US, in emerging markets or in Europe,” he explains.
As Brookes notes, the growth story is, really, a technology story. “It really is FANGs; Facebook, Amazon, Netflix and Google, and BATs; chinese tech firms Baidu, Alibaba and Tencent.”
Rock is more positive on both growth and technology stocks, which he plays using the Morningstar Silver Rated T Rowe Price Global Technology fund.
His argument is that, while accountancy methods are good at understanding the cost of a factory or a machine, they are less adept at measuring investment into intellectual property, as most firms write their software development off as an expense.
Take Google. The real value on its balance sheet is its search algorithm, but it’s impossible to value because it’s all been expensed. “If you’re just writing off the expense of developing the algorithm for search at Google every year, your price/book will be enormous,” explains Rock.
Brookes disagrees, of course. “It’s not that Amazon isn’t a great company, it’s not that Apple isn’t a great company; Amazon is currently trading at 220 times earnings – that’s quite a lot.”
He notes that in comparison at its trough back in 2009 it was trading at 26 times earnings and no-one wanted to own it. Now, people think “Amazon’s going to take over the world… but it can’t even get into China”.
Even when you talk about Amazon’s data warehouses – its Amazon Web Services cloud computing platform – Azure, Microsoft’s version, is “easily a cheaper way to play that”.
