The ongoing discussion about value versus growth investing has been one of the dominant themes of 2016.
Given the outcome of the US election and the possibility of more political turmoil in the UK next year after the ruling on executive powers and Brexit, I am surprised it takes up so many column inches. Maybe that will recede while we digest the FCA’s Asset Management Review released on 18 November.
Little occupied the financial media headlines in November other than the Trump election win.
That seismic shock to markets and populations alike overshadowed other significant events, such as in the Indian prime minister Narendra Modi’s removal of the two largest banknotes from circulation almost overnight. That attempt to deal with unaccountable wealth in India is a big deal.
The value versus growth discussion is by no means new and it does not usually occupy our minds. The relationship warrants little more than a cursory glance to us at T Bailey.
Defining value is in itself a conundrum; it means different things to different investors. To us and, importantly, the one value manager we choose to invest with, it means investing in businesses trading at well below their intrinsic worth.
Much was made of closet-indexing active management and overpaying for it in the FCA’s industry review. Whether passive or active, the assumption therein is that the index is a fair reflection of the opportunity set. That represents a leap of faith.
The relevance of a company’s market capitalisation, as it translates into a percentage in an index, in portfolio construction is open to question.
Is it too simple to say the active manager owns the stocks he likes and avoids the ones he does not? Not really, but the FCA has a point here.
We have many issues with the FCA review, not least the relevance of size and being too big to deliver what retail investors need as investment outcomes.
However, the closet-indexation that results from under and overweighting most of the constituent parts of an index is worthy of criticism. However, it is an institutional investor problem and not one that should be inflicted on retail investors.
