Nick Train: Value was a 20th-century phenomenon

Nick Train has played down stretched price-to-earnings ratios on companies like Hargreaves Lansdown as he warns digital disruption could mean value investing is consigned to the last century.

In his latest monthly update on the Finsbury Growth & Income trust, Train (pictured) said the growth versus value cycle is a 20th-century paradigm that may not hold in the 21st century.

“In 2018 it looks as though working out which companies are advantaged and which challenged by digital disruption may deliver better returns than establishing what is currently ‘cheap’ or ‘dear’ or whether macro-economic trends favour ‘cyclical value’ or ‘quality growth’,” he said.

The tech-heavy Nasdaq has been the best performing major index in 2018, compared to traditional value markets, such as Germany and Japan, which are down, he pointed out.

Value was the worst performing stock category in Europe in H1 2018, underperforming expensive shares by 10%, according to Goldman Sachs.

Train said: “In 2018 we note that government bond yields have gone up, as oil and other commodity prices have advanced.

“The symptoms of a widely-predicted cyclical upturn are there. But we also note these developments have not had the effects that 20th-century market theory expects.”

The implications don’t paint a rosy picture for the FTSE, he added.

“The top five UK companies by market capitalisation are a bank, two oil majors, an arguably ex-growth drug company and a tobacco stock. Not being disparaging, but this is no collection of Faangs.”

Hargreaves haters

Burberry, the London Stock Exchange, Fidessa, Daily Mail and Hargreaves Lansdown have been the biggest contributors to performance in the investment for H1, said Train.

“All of these we have seen characterised as ‘expensive’ in recent times,” he said.

“Hargreaves with its longstanding P/E in the high 20s has outraged value investors for many years. But the fact is it is the success of the strategies of these companies – strategies with technology at the heart of them – that has mattered much more to stock market investors than the valuations.”

Sage is the investment trust’s worst performer in 2018, but Train attributes that to challenges in migrating its business to the cloud. “That fall has nothing to do with valuation or rising interest rates,” he said.

Value traps

Train conceded value will become so unloved it will have to make a comeback, but warned that some of value investors’ most compelling opportunities will be revealed to be ruinous value traps, due to digital disruption.

“In the end everything hangs on what is the true value of a corporation’s future cashflows, discounted back to today’s intrinsic worth.

“It’s just that during the 21st century to date what looked expensive yesterday has turned out to be in fact far cheaper than most of us could imagine.”

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