Do not write off value investing
DONE WELL FOR A WHILE NOW
Using Morningstar data, Schroders recently analysed European equity funds’ make-up. Around 90% were in portfolios predominantly growth focused – they have more than 50% of holdings in what Morningstar considers growth stocks.
This suggests the world has become very polarised in terms of investment opportunities.
Growth has been on a multi-year winning streak and value has persistently underperformed. The gap between the two has continued to widen.
Investors who have followed the growth story have done very well; those who persisted with value strategies have probably been disappointed.
However, Andrew Lyddon at Schroders argues at some point this must become unsustainable.
“While it seems like the global stock market has had a very good time in recent years, that return has been delivered from a very narrow group of companies.”
Returns from US stocks have been substantially higher than the rest of the world.
“Even in the US, that return has also been pretty narrow. It’s been driven by growth, tech and high momentum stocks.”
The result is a distortion that many value investors feel is now in their favour.
“If you’re someone who believes … that mean reversion gives you opportunities as an investor, this tells you that there is a lot of opportunity stored up in value,” Lyddon argues.
He acknowledges this is a difficult argument for many investors to hear, when the style has performed so poorly for so long.
However there’s still good reason to consider allocating a portion of your portfolio to value investments: diversification.
For Lyddon, value investing will always be a valuable strategy.
“There have been many times when people have thought … maybe value investing is no longer applicable. People thought that in 2000, for example, but it wasn’t the case then, and it’s not been the case yet.
“The reason for that is [value investing] benefits from the behavioural flaws of the stock market – the fear, the greed, the worry when you look at your portfolio going down and the exuberance when you see it racing higher.”
Value investors try to step back from that, says Lyddon.
“They try to strip out those emotions and exploit them for their own benefit...”
Patrick Cairns attended the Schroders International Media Conference in London.