Holly Black: Welcome to Morningstar. I'm Holly Black. With me as Mathieu Caquineau. He is from the Morningstar Manager Research team. Hello.
Mathieu Caquineau: Hello, Holly.
Black: So, I think one of the big themes of the year so far has been the value comeback. What is behind this resurgence after a pretty dismal period of time?
Caquineau: Yeah. So, the value rally for European stocks started in last November when market participants started to price in a stronger than expected economic recovery partly based on vaccines, partly based on stimulus and that value rebound actually continued since the beginning of the year, only to just slow down a bit in recent weeks. But if you look at the last six months, the MSCI Europe Value is up 28% whereas the MSCI Europe Growth Index is only up 12% in the same period. So, value stocks tend to be economically sensitive. So, energy, commodities, bank stocks, they have all led that rally that we've seen.
But this short-term outperformance has not erased the large advent of growth funds versus value funds over longer periods of time. It has been such a difficult decade for value managers that it's going to take much more than a six months' outperformance to look good again. But any signs of rebound is fueling hope that value is indeed back for good.
Black: But we have had over the years a few, sort of, false dawns where we thought the value strategy style had come back, but it lasted a really short period of time. So, do you think this time it's different?
Caquineau: Yeah. So, it's always hard to say – and you're right, value had a few episodes of short-lived rebounds. If you look at the last 10 years, none of them lasted very long. They have all disappointed investors. But fundamentally, we know style work in cycle, and we have clearly been in a growth cycle for so long that now valuation for some growth stocks look stretched. So, all is in place for value to be back, especially if we see a stronger than expected economic recovery that could boost the earnings outlook for value stocks. But there is no certainty. And I think it makes sense for investors to look at their portfolios, see if they have an appropriate diversification in terms of style. If you've let your winners run in recent years, you might have a bigger, much bigger allocation to growth managers than what is desirable from a risk management standpoint.
Black: And it's not just about choosing a growth fund or a value fund for your portfolio. It's about choosing a good manager that can actually deliver because value investing is not as easy as you might think. Are there a couple of strategies that you particularly like?
Caquineau: Yeah, we do have several European equity value managers that we like with positive analyst rating. Those value managers have built an expertise in applying the value style which is much more complicated than it looks like. And one of our preferred managers in this space is Brandes European Value. So, this fund is managed by a five managers committee with a lot of experience. This strategy is based on collaborative decision-making on being disciplined and being patient. And all that makes the fund quite distinctive. But the fund has few benchmark constraints. They often invest in popular stocks. They also invest in small and midcaps more than their peers. So, it's a strategy that carries high risk. But investors have been well served over the long term.
Another one I wanted to mention, Holly, is the M&G European Strategic Value. That's a fund led by Richard Halle. He has been around since (28), managing this fund with great expertise. He is using the price to book ratio to screen the investment universe and then does a deep research to avoid investing in companies that are cheap for good reasons. And this approach has been executed with consistency and good risk awareness. And that's one of the key reasons why we like it so much. So, those are the two preferred options at this moment in our coverage list for European value managers, Holly.
Black: Fantastic. Mathieu, thank you so much for your time. For Morningstar, I'm Holly Black.
