Investment styles – is there a catalyst for change?
The article reiterates the factors that determine which investment style performs best at different points in the economic cycle. We identify some Funds and their managers who are known for adopting a particular style and summarise the current outlook.
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We noted in our first piece on this subject that Stock Markets have been through a long period when growth has been favoured.
However, an increasing number of professional investors believe that we have passed a turning point for value stocks and they are now well placed to outperform their growth counterparts. Low interest rates and record low gilts yields have left them out of favour for a decade.
However, with popular defensive growth stocks such as Unilever and Diageo now on very high valuations this has caused some experts to question how much further they can go.
‘value stocks perform particularly well when bond yields rise significantly’
Nick Kirrage, a value Fund Manager at Schroders, has pointed out that value stocks are more out of favour now than at any point in the past 40 years. History shows that value stocks perform particularly well when bond yields rise significantly. It will also depend on the trajectory of interest rate rises which is beneficial for Financials such as Banks.
However, a sustained rotation from growth to value is also determined by human psychology. There needs to be widespread confidence in the sustainability of growth for a significant number of investors to follow the herd.
How do I select a value or growth fund?
Some Fund providers adopt more of a house style; for example, Baillie Gifford and Axa Framlington are best known for growth while M&G & Invesco Perpetual have more of a value approach. Other Fund Managers will have both styles in their range of Funds, including Fidelity and Schroders.
Growth Funds are more likely to include ‘Growth’ in their name so are easier to identify (although ‘Discovery’ or ‘Dynamic’ are also names that are used). Mid Cap and Smaller Companies Funds tend to be growth orientated as they are trying to pick tomorrow’s winners. Some well known ‘growth’ managers include Nigel Thomas (Axa Framlington UK Select Opportunities), Terry Smith (FundSmith Equity) and Douglas Brodie (Baillie Gifford Global Discovery).
There are fewer true value Funds to choose from. In reality less than 10% of funds available in the UK adhere to a consistent and defined value style and, unhelpfully, those that exist do not always include ‘value’ in their name to give you a clue.
Funds with a value style may include those with the titles ‘Special Situations‘ or ‘Recovery‘ along with some income funds. Some well known value Fund Managers include: Alex Wright (Fidelity UK Special Situations), Nick Kirrage (Schroder Recovery/Global Recovery), Ben Whitmore (Jupiter UK Special Situations) and Henry Dixon (Man GLG Undervalued Assets).
If a Fund has no particular style remit laid out in its mandate you may need to read the latest Factsheet and reports to understand what approach it is currently pursuing.
‘the UK’s economy could falter if Brexit negotiations do not proceed smoothly’
Many Fund Managers describe themselves style agnostic and simply search for the best opportunities to make money regardless of where we are in the economic cycle. The term ‘blend investing’ has been coined to describe this approach. Fund Managers who have re-positioned their Funds from growth towards value to take account of the improved growth environment include Richard Buxton of Old Mutual UK Equity Alpha and Jacob de Tusch Lec of Artemis Global Income.
Multi- Asset and Multi- Manager Funds will typically change investment style in response to the economic outlook, tilting their portfolios towards the style they think most appropriate as any time.
Of course, companies and sectors themselves do not always remain in the same category. They may fall out of favour and become ex- growth. For example, the pharmaceutical sector has de-rated on the back of worries of pressure on pricing and some of the leading constituents having a mature drugs pipeline. Tobacco stocks, meanwhile, have moved the other way, from a perception as low growth businesses to ones benefiting from growing demand in Emerging Markets and high barriers to entry.
With further interest rate rises expected in the US and inflation picking up globally there seems to be a strong possibility that the renewed interest in the value style may continue for a while.
The recent strength of Stock Markets is certainly factoring in confidence that the expansionary plans of Trump will lead to an escalation in global growth. However, some regions may suffer if the US proceeds with protectionist policies and in addition the UK’s economy could falter if Brexit negotiations do not proceed smoothly.
A failure of growth to meet expectations would likely result in a flight back into defensive Equities and Bonds.
Having outlined the pros and cons of each main investing style it is clear that neither is right or wrong but a personal preference. But understanding what you are investing in will help you build the best portfolio for your needs. One style will suit some and not others or one might appeal more at particular times in your life depending on your goals and time horizon.
It’s always hard to predict the turning points in styles, which can be dramatic. Therefore, as the most important issue is to make sure your portfolio is well diversified over time, it may well be worth investigating whether you have some exposure to the value style. Although we have seen that a style can be in or out of favour for lengthy periods this does not mean that an active manager in either camp will not be able to find opportunities even when their style is out of favour.
Important Information: Willis Owen does not give investment advice so you will need to decide if an investment is suitable for you. If you are unsure whether to invest, you should contact a financial adviser.
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