Has value had its day?

Cavalier references to the rivalry between growth and value investment styles are 10 a penny. Whether along the vein of “Growth versus value: Which style will dominate?” or, more recently, “Is it value’s time to shine?”, preoccupation with the two investment camps can reach fever pitch at important junctures in global markets.

This was certainly the case in November when positive news on potential Covid-19 vaccinations, confirmation of Joe Biden’s victory in the US election and hopes for a successful Brexit deal all combined to bring about a significant market rotation.

At the time, collective market optimism was so powerful that six months’ worth of growth gains over value were wiped out in a single day, according to Barry Norris, chief investment officer at Argonaut Capital. Unloved sectors such as airlines and more cyclical sectors such as financials and oil and gas led the ‘recovery rally’.

The irony is that value investors are by nature pessimists, says Tom Stevenson, investment director for personal investing at Fidelity International. This means when positive news kicks in, their portfolios are likely to benefit because they planned for the worst.

He explains: “There is a temperamental difference between a value investor and a growth investor. A value investor assumes things are going to go wrong, therefore does not want to overpay. This means if things are no better than their worst fears, it is reflected in the price and they have not paid too much. Growth investors assume there are lots of opportunities out there and things are going to be ok, which means it is ok to ‘pay up’ because in the long run the price will be justified.”

Another irony is that growth companies tend to do well in a low-growth world such as we have been in since the global financial crisis in 2008/09. This is because they can grow at a rate faster than the world around them, which is particularly attractive to investors when interest rates are on the floor.

Indeed, if you had invested £100 in value shares 10 years ago, it would now be worth £214, while the same sum would amount to £386 if it had been invested in growth shares over the same period.

Entering the thirteenth year of the growth rally, investors are right to question how much longer it can be sustained, says Tim Cockerill, investment director at Rowan Dartington. “There is a risk in a long rally that investor money congregates in certain areas – we know that and can see it. This mindset can take time to change, which is why it is important to keep your portfolio balanced in terms not only of asset classes and geographies but also investment styles. I generally have 85% allocated to a growth slant and 15% to value.”

He doesn’t expect any value rally to match the length of this most recent growth rally, but can foresee a situation where valuations are redressed and investor money is recycled from expensive growth stocks into value areas.

As market participants jostle to work out which style will dominate in 2021, investors can expect to see increased volatility, says Mark Harris, chief investment officer of Garraway Discretionary Fund Management. “While we can see a path to better growth and further rotation towards more cyclically orientated sectors, we also believe Covid-19 has wrought dramatic acceleration to a longer-term secular shift. This means numerous sectors now defined as ‘value’ have been and will remain challenged.”

When it comes to investment trusts, Cockerill cautions against associating value solely with those on a discount. As an example, he points to Fidelity Special Values, which was trading at its net asset value as of 18 December 2020. “Although the trust does not offer investors a discount, the underlying companies do give exposure to a value investment approach.”

Simon Elliott, head of research at Winterflood Investment Trusts, says several trusts focused on the UK have a value-orientated approach. These include Fidelity Special Values and Aurora Investment Trust in the UK All Companies peer group, Aberdeen Standard Equity Income and Temple Bar in the equity income sub-sector, and Aberforth Smaller Companies in the UK Smaller Companies sector.

He believes not all value approaches should be treated equally: “While value-orientated investment trusts might be expected to benefit from the positive impact of the rollout of vaccines for Covid-19, it is worth noting those exposed to more cyclical and economically sensitive companies have seen the biggest bounce so far. Trusts with a high exposure to areas such as banks or utilities are unlikely to participate to the same extent initially.

“Indeed, one of the arguments for a rotation into value is the thesis that increased government spending will create inflationary pressures and eventually rising interest rates. [Generally, rising interest rates denote a stronger economic backdrop, which supports value stocks, while in a low interest rate environment growth stocks tend to prosper.]  While we might eventually see some inflation, it’s difficult to envisage it being a factor in the next few years.”

Value will have its day again, but when that is and how long it lasts remains to be seen.