One of the major themes in recent investment commentary is
the return of ‘value’. After several years when both ‘growth’ stories and the
quest for yield outperformed value-based strategies, the last 12 months has seen a
dramatic rotation of capital to value shares and strategies.
In 2016 the MSCI Growth Index grew by only 3.21% against 8.15% for the MSCI World Index, this being the first
significant calendar year under-performance for Growth since 2004.
Conversely, in 2016 the MSCI Value Index grew by 13.23%, the
first significant out-performance of Value since 2006.
What has driven this performance and could it last?
An interesting way of tracing the sources of value’s
apparent renaissance is to explore the recovery of recovery funds.
In the year to 17th February 2017 the highest
performing funds in the UK All Companies Sector over a 12 month period had a ‘recovery’
stance:
Standard Life UK Equity Recovery up 77%
River and Mercantile UK long Term Recovery up 44.9%
M&G Recovery up 39.6%
Schroder Recovery up 36.8%
Scanning their top 10 holdings the obvious catalysts include
overweights to the mining sector (Standard Life: Anglo American and Glencore);
banking (River and Mercantile: HSBC, Lloyds); and energy (M&G: BP); and a
broader positioning of the portfolios away from winners of the last few years
such as consumer staples.
Some of the fund managers concerned such as River and Mercantile’s
Hugh Sergeant in his ever readable Quarterly Report argue that value’s resurgence has only just begun: “This is a
profound shift and my key message is that we are only at the beginning of it. Like
all trends it will not be a straight line, but the change of direction is clear.”
Schroder’s value team state:
"Where we do feel confident, however, is
that, over the longer term and after what represents only a small-tick-up in a
very long period of underperformance, value looks well set."
I hope they're right, but I doubt that value's high returns of the last 12 months will easily be repeated. Will HSBC or the mining companies such as Glencore nearly double or more again in the next 12 months? It's difficult to discern an obviously cheap but still investable sector in the UK stock market. Perhaps global diversification with a value bias is the answer?
Go Global; Go Passive?
There is no shortage of passive value options: the Vanguard Global Value Factor ETF (VVAL) was up 54.9% in the year to 17/02/2017, although interestingly River and Mercantile World Recovery B Inc was up slightly more at 58.5%, and Standard Life UK Equity Recovery rose by 77%.
Yet one does not have to go back far to be reminded that value investing's long-term gain can involve severe short-term pain:
From Feb 2015 – Feb 2016 the World Recovery fund fell by over 13%; Standard Life Recovery fell by
17.9%, even Vanguard's Value Factor fell by over 10% in the first few weeks after its late 2015 launch.
When it works, value investing really works, but with sustained periods of underperformance a given, it is is not for the faint-hearted.
