Herd mentality – time to think differently?
John Templeton’s Investment Maxims have never been more relevant when assessing the case for Value versus Growth at this juncture. Let’s be quite clear, not all Growth stocks are likely to be poor investments from here – some of the most modern businesses we are all coming to depend on fall into the category of Growth. Amongst may wise words though, he said to be successful in investment, try and avoid permanently any one type of asset – the best results are achieved by changing from popular to unpopular – to buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude but reaps the greatest rewards.
And of course, there may be no single obvious macroeconomic catalyst for change. As one US fund manager put to us recently, many investors have already given up on Value as a way of investing (to buy more Growth), but if not now, we must be fairly close to the point where those that were going to exit Value have already done so. A Value recovery could be very powerful if the marginal buyer changes view.
Trends to low cost index products and switching to passive from active managers will probably mean that Value investors must likely have to be patient for a little while longer. The greater use of low-cost products means inevitably as growth names keep being bought their index participation also goes up and so the industry creates the next self-fulfilling trend – until the flow stops! Then we will see how high ownership concentration in just a few stocks is truly put to the test.
Generating outsized returns requires an element of contrarian thinking, coupled with a degree of patience. We recognise value investing has had a miserable time in recent years and many clouds of doubt exist over its future. However, we firmly believe Value’s period in the sun will come again.