Ian Kelly, a manager on the team, said as valuations have become so stretched globally, the team has gone from investing one in 15 companies they research, to just one in 50 as they have become “more picky” about what they hold.
At the same time Kelly, who has specific management duties on the Schroder Global Equity Income fund, said the portfolio has increased its cash weighting from its typical level of 1% to 9%, owing to a combination of valuations rising and valuation dispersions falling.
“When people forget about valuations as being important, and worry more about momentum, correlation etc, value investors do badly,” he said. “If you look at the Cape ratio, it has only been higher and 1929 and 2000, as value has underperformed growth as style since 2015.”
Owing to concerns about valuations, Kelly said of the 300 stocks the Value team researched, modelled and spent time looking at during the summer, it bought only six (2%).
“We have not lowered our threshold of valuation for buying stocks, but we are having to turn over more rocks to find stocks that tick the right boxes,” Kelly said. As a result the number of stocks in the funds have fallen from 50, to around 40, a number he said is manageable.
However it’s not all bad news and Kelly said it is rare for value to underperform growth as a style for over a decade.
“If you think about periods where value has underperformed as a style versus growth for over a decade, these periods are very rare,” he said. “It happened in 1929, it happened again in 1999-2000 and again in 2015 onwards. So it is rare for value to get a shoeing for a decade.
“We are fortunate that most of the value funds are top quartile so we adding alpha to the value style, so it is not a sob story but value has had a tough time.”
So does Kelly see any catalysts for this change, and a time the number of stocks in the portfolios start rising again and cash is put to work?
“New ideas come along in clusters,” he said. “It may be that a certain sub-sector falls out of favour, or maybe a wide range of stocks become cheaper.
“Other than that, we view value stocks as being like short-duration high-yield bonds – in that you you get most of your cash flows in the near term – as opposed to a growth stock, which we think of as low-coupon long-duration bond – in that they generate little cash flow today, but might in 10 years.
“Over the past couple of years, this is how value has performed, doing well if rates or inflation rise. But, we stick to buying cheap stocks, and are happy to admit that when it turns it will turn for reasons that no one forecast.”
