Are we finally getting the prolonged rally that every value manager has been praying for for more than a decade?
It’s a topic being discussed in many of our external meetings with equity managers. In the past 10 years, value rallies have become increasingly violent, with the most recent being no exception. In fact, January 2022 saw the second biggest rotation globally into value in the past 50 years, while the growth driven sector of technology suffered its second worst quarter in two decades.
The question is whether it is already too late to get on the value train? If you had asked me that three years ago, I would probably say yes, but we are in a completely different world now, where inflation is going to be more persistent.
Inflation is already 7.5% in Europe and 8% in the US. Let’s assume the best-case scenario that it does slow and begins to drop back. Even if those figures are halved in 12-18 months, inflation is still operating at a fundamentally different level to what we’ve been used to since 2009.
We also must consider the depths from which the value rally has come from. Although the MSCI ACWI Value index beat its Growth counterpart by almost 9% in the first quarter of this year, the longer-term figures still make for ugly reading. Research from GMO shows that from the beginning of 2009 through the end of 2021, while the MSCI ACWI Value index returned a commendable 9.2% per annum, the MSCI ACWI Growth delivered 14.5 per cent per annum and out-compounded value by some 265% cumulatively.
GMO believes value still represents a significant opportunity. Based on its own ‘price-to-fair-value’ valuation metric, which calculates the ratio of the most expensive third of stocks divided by the cheapest third of stocks within each sector (based on price-to-fair-value), comparing today’s valuations to history it found that the spread in the majority of sectors “remains in the most exciting 10% of history”.
‘We’ve always said inflation would reinvigorate value’
TB Wise Multi-Asset Growth manager Vincent Ropers agrees, adding that the discrepancy between value and growth globally remains as extreme as it has ever been. He says global value equities have underperformed global growth by more than 50% since 2007, with value being 25% behind growth in the past three years alone. He says that while valuation alone is not a good enough buy signal, the discrepancy in figures is a major anomaly and those divergencies do tend to migrate together.
It is hard to disagree. We’ve always said inflation would reinvigorate value and here it is doing precisely that. To my mind the days of being heavily tied to growth are over. You also have to factor in the likes of the oil price – because of Russia – and the wider rise in commodity prices.
The other important factor to consider is that this is traditional inflation, not the asset price inflation we saw as a result of quantitative easing, which went straight onto bank balance sheets.
There’s also the extra layer of protection you can arguably get from a value manager in this climate. This is because a value manager looks at the assets as they are now, kicks the tires, looks at what the downside can be and then where they stand relative to their evaluation.
The saying goes that there is more than one way to skin a cat. Those who are backing the value recovery on this occasion should probably look to some of those old-style UK equity income funds, which have significant exposure to many of those unloved value sectors.
Let’s not forget the FTSE 100 is a value tilted index – a major contributor to why it has underperformed and is currently operating at a discount to its global peers.
However, the UK was the only major stockmarket to end Q1 2022, in positive territory, courtesy of its commodity and oil stocks and that lower starting valuation.
Good options would be the likes of Schroder Income, a deep value driven portfolio managed by Nick Kirrage and Kevin Murphy, or the GAM UK Equity Income fund, which currently has almost a third of its underlying holdings in financials.
For those who’ve seen too many false dawns to trust in a prolonged value rally, there’s always style agnostic vehicles, which can jump in and out of either style as they see fit.
A good example would be Janus Henderson European Selected Opportunities manager John Bennett and his team, who have been looking to add value to their portfolio in recent months having “seen signs it could dominate in 2022”. Other popular vehicles with this flexible mandate include Fidelity Global Special Situations and BlackRock European Dynamic.
