Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
High quality growth stocks have hogged the limelight over the past decade as investors have looked for defensive qualities in some of the world’s biggest corporate names. So, it’s perhaps no surprise markets stuck to these same growth stocks as virus volatility hit.
However, after outperforming the broader market in March, a reversal saw unloved, lowly-rated value stocks take over from the highly-valued growth names in April. Both styles have tussled for leadership since then, passing the baton back and forth over the past two months as confidence has waxed and waned over our ability to contain the virus spread.
But, while investors might be watching closely for signs of a short-term breakout for either style, widen the frame and a pattern begins to emerge.
The latest Fidelity research shows that historically, value names have never been so cheap relative to growth stocks, and currently sit at historically low multiples. Moreover, when the divergence has become this large in the past, value has gone on to significantly outperform on a long-term view.
Part of the explanation here is the market’s tendency to revert to the mean over time, meaning both styles eventually come back in line and swap leadership if given a long enough period.
The outlook for interest rates comes in here too. If improving economic growth prompts a rise in rates, growth stocks could become less attractive with value names, like some of the big banks, benefitting.
With many investors currently questioning what seem to be stretched valuations among the likes of the US tech giants, adding value to a portfolio now could be a welcome diversifier.
For those aiming to snap up good companies hit hard this year, it will pay to carefully sort those with good and manageable balance sheets from those laden with bank debt. If it remains difficult to get back to business as usual, that debt will hurt even more. Times like these can show which companies are unfairly hit and which ones are now cheap for a reason.
The Select 50 has a number of funds dedicated to finding value where others fail to see it.
In the Artemis Global Emerging Markets Fund, manager Raheel Altaf applies a blend of systematic and qualitative approaches to his value strategy. Altaf’s team uses a proprietary research tool called SmartGARP initially - a data-driven screening process designed to unearth undervalued companies carrying some exciting growth prospects.
Altaf then adds the human element by looking at the “real-world reasons” why these companies might merit inclusion in the fund. For the manager, this process takes the emotion out of the initial discovery and allows the team to interpret data for a large number of companies quickly and efficiently. This is a key advantage in such a wide investable universe and, according to Altaf, serves up only the best ideas for discussion.
Alex Wright, manager of Fidelity Special Situations Fund, is unashamedly contrarian, searching for out of favour stocks other investors have tarred with an unfairly negative brush and look particularly cheap as a result. He aims to identify what the catalyst might be for that prevailing negative view to change and the likelihood that it will.
The rationale behind the process is that highly-valued companies have little potential to rise much further, whereas undervalued shares can rise sharply if things turn out to be better, or no worse, than the consensus expects. There is also less risk in holding the shares because investors already expect bad news and will, therefore, be unfazed by further disappointments.
The fixed income analysis in the Colchester Global Bond Fund starts with attention to national inflation forecasts and yields on offer, in order to form a view of each country’s financial stability. These forecasts allow the team, led by veteran manager Ian Sims, to generate distinct bond portfolios for each country.
A value approach, the strategy can result in outright contrarian plays, with the resultant portfolio a blend of bond and currency exposure, balanced by the team’s conviction in specific ideas and close consideration of risk management.
Growth investing: Growth investors seek the shares of companies where the principal attraction is earnings growth.
Value investing: Value investors actively seek the shares of companies that they believe the market has undervalued.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Due to the greater possibility of default an investment in a corporate bond is generally less secure than an investment in government bonds. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.