This brief commentary looks at the benefits of following value and growth strategies in investment, teasing out some perhaps surprising insights.
The following brief comment comes from Simon Nicholas, senior fund manager at Brown Shipley, the UK-based wealth management house. The article considers two broad terms used to cover people's choices about whether to hold a particular type of investment. With markets turning in some ways more volatile, now may be an auspicious time to re-visit some of the reasons for buying, holding or selling securities.
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Growth and value are fairly simplistic terms to help us understand a number of different factors that drive stock performance. Fund managers often have a preference for one or the other. Growth, momentum and quality have all been style elements that have led markets in this low interest rate, low growth environment. The Russell 1000 value index has produced half the return of the Russell 1000 Growth index over the last 3 years (to 31 August 2019).
But is it as simple as that? Below we will outline two funds that have distinct styles, but optically may appear to have changed - but have they? In multi asset portfolios we aim to blend funds with different styles and market cap sizes together, leveraging a manager's skill to add alpha almost regardless of the market environment, giving us the opportunity to outperform whichever style prevails. The continued underperformance of value leaves us intrigued about the opportunity and possible rotation, but will we need to adjust our portfolios, or could certain funds/managers help us in this regard?
The basic principles of value Investing are clear, select a stock that appears to be trading lower than its intrinsic value. Seeking a misinformation, an asymmetry, and holding your nerve until the market adjusts. Traditionally, this has led to value managers holding very similar sectors: utilities, financials, materials.
Meeting last week with Bill Hench, the manager of the Legg Mason Royce US Small Cap Opportunity Fund, a deep value fund, I was surprised to hear that these are not the sectors where he is currently seeing opportunities. In the last 10 years he has rarely seen real opportunities in healthcare, more typically a growth sector. But recently he’s been able to take positions in healthcare providers, healthcare service companies and equipment makers, all quality businesses in a sector currently out of favour. An exciting time, growth stocks at value prices, and a fund manager doing what he loves to do.
Baillie Gifford Emerging Markets Fund is definitely a growth fund. Its new portfolio positioning, made clear at a recent meeting, represents recent purchases and means its biggest sector overweights are now oil, gas and consumable fuels, materials and mining, insurance and autos. These are more typically sectors associated with value and cyclicality. It is now overweight Brazil and Russia as a consequence. So does this mean the fund/manager has changed his spots? No. This is where the growth is. The five-factor research framework remains the same.
Companies in the previously mentioned sectors are simply where they are finding the best growth opportunities. Energy was previously the most underweight sector in the fund. So, the fund hasn’t changed its style, the manager hasn’t changed his process, the market has simply presented new and different growth opportunities. Some of the old favourites remain, Alibaba for example grew its revenues at about 40 per cent last quarter, TSMC is still in the fund, winning the 5G race versus Intel. So this remains an adaptable team in a dynamic market.
Does this change our positioning? Possibly not, holding a balanced portfolio with disciplined managers will still give you the full sector exposure, just not necessarily where you would expect; it does, however, highlight an opportunity whilst reiterating the importance of understanding each fund, in all market conditions.