If 2016 was a value year, then the November we just went through was a value month. Albeit brief and few and far between, these are the most memorable timeframes in recent years when value as a style has notably outperformed. These periods aside, you would need to look back a decade to find any meaningful period during which value was rewarding.
In these short periods when the value investment style has rebounded, it’s also worth considering how global growth managers have fared. These are managers and funds that have been en vogue and eclipsing the global equity market this year, as well over the past three, five and ten years.
But during November, while global equities as a whole rose 8.8% in sterling terms, there was a wide disparity between styles: the value index soared 11.1% while the global growth index climbed 6.8%.
Looking at the 19 global large-cap growth funds managers that are rated positively by Morningstar analysts, about a third outperformed the mainstream market. Chief among them was the MFS Meridian Global Equity fund, which was up 10.4% in the month. At the lower end, was Stewart Investors Worldwide Leaders Sustainability, up 4.6% and Fundsmith Equity, up 4.9%.
Underweighting Technology
What's the main difference between these strategies? The MFS fund has a large underweight to technology at 10.2% of the portfolio versus 30% for the global growth index. This stance over the longer-term as well as it not being as growth-oriented as peers, also serves to explain why the fund sits nearer the bottom of the category over a five year period, given that it hasn’t really participated in the strong technology run.
While Fundsmith is also underweight technology, it has Microsoft (MSFT) as the top position at nearly 8% of the portfolio, with Paypal (PYPL) and Facebook (FB) almost among its largest holdings. A mix of healthcare names such as Novo Nordisk (NOVO) and Idexx Laboratories (IDXX) also feature in the top ten, along with consumer plays including Estee Lauder (EL) and L’Oreal (OR). These are long held names where the quality aspect ability to convert most of their net income into free cash, have helped performance over the long term.
But being underweight technology and having a smaller allocation to the communication services sector than most of its peers has contributed to the fund being just below halfway in its category for this year to the end of November. The fund's impressive long-term showing remains in tact.
Notable consistent performers that have beaten the mainstream global equity market this month and which are also top quartile in the Global Large-Cap Growth sector over three, five and ten years include Baillie Gifford Global Alpha Growth, T. Rowe Price Global Growth Equity, Robeco Global Consumer Trends, Capital Group New Economy (LUX) and Capital Group New Perspective (LUX).
Best Week Ever
During November, some value managers had their best week ever relative to the global equity market. We also saw a cluster of managers with that style in UK equities return between 20 and 30% for the month.
However for 2020 as a whole that cohort is still in the bottom quartile of the UK Large-Cap category. Clive Beagles who runs Silver-rated JOHCM UK Equity Income, admitted that it could take three to four years to get all the performance back, and look competitive again versus the index over a reasonable time period.
Some of the more flexible managers we have been speaking to in recent months noted that with the market fervently favouring predictable growth companies, some remaining stocks were languishing at trough valuations. Although it meant being selective within that pool, Richard Watts who runs the Silver-rated Merian UK Mid Cap fund, with his top three holdings in tech plays (The Hut Group, Boohoo and Asos), added some cyclicality. Ahead of the recent bounce he introduced stocks such as Jet2, Bellway and Centrica to try and provide more balance in the portfolio.
Although one swallow doesn’t make a summer, there doesn’t necessarily need to be a catalyst nor a more positive outlook for market leadership to change shape. Clearly we don’t know where the future lies but stockmarkets are forward-looking, so it’s important for investors to consider the balance in their fund holdings with style in mind.
