Rocky relationship
To illustrate the definition problem, the top participant in both the MSCI World Value and the Growth indices is Apple, at 1.63% and 3.86%, respectively.
For many, Apple is just a growth stock. The indices, like many such measures, are imperfect at best, not least for those that continue to use indices as portfolio construction tools. T
he relationship may have some predictive element of impending trouble for equity markets, as seen in the dotcom boom then crash at the turn of the last century, and we should bear in mind we have just had seven years of extraordinarily loose monetary policy, which has inflated many asset prices.
It has also encouraged many companies, particularly those in the US, to leverage their balance sheets and buy back stock. Some have borrowed to sustain dividends, which is a red-card offence in our book. But borrowing has been dirt cheap, thanks to quantitative easing.
Many of those companies are in the value bucket and many are large-cap stocks, which brings me to my next point.
Consultants advise large investors using managers that seek to beat conventional indices that having banked the growth trend, they should now tilt towards value.
In other words, having eschewed investing in banks, miners etc, is it now time to close the bet and maintain the alpha? This can also be done through the use of exchange-traded funds. Some of the large banks are cheap on a price-to-book basis, apparently, but what is in the book, especially in Europe?
