The Multi-Manager People's View

Don’t write Value off just yet

Gary Potter

Co-Head of Multi-Manager

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Risk Disclaimer

The value of investments and any income from them can go down as well as up and investors may not get back the original amount invested.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

Growth has delivered post the GFC

‘Value’ and ‘Growth’ as investment styles are over generalised terms, as within each category there are undoubtedly varying degrees of purity. Nevertheless, in its broadest sense ‘Value’ – which typically tends to have greater cyclicality and less sensitivity to interest rates – is now the most shunned for some time. Since the Global Financial Crisis, the S&P 500 US Value Index has underperformed its growth counterpart by 108% through to the end of last year.  Year-to-date, this gap has widened still further as economically sensitive stocks suffered in the COVID-19 induced recession, with Value underperforming by a another 31%. The extent of underperformance of Value investing has never been greater globally, leading many investors to question whether Value investing is dead.

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Risk Disclaimer

The value of investments and any income from them can go down as well as up and investors may not get back the original amount invested.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

Investors remain wary

Sentiment towards Value appears not to be changing, at least in the short-term. The monthly Bank of America Merrill Lynch Fund Manager survey in April, highlighted a near all-time low of the number of investors thinking Value stocks will outperform Growth from here. However, if history is anything to go by, to completely disregard Value investing would be foolhardy, in our opinion. Having the experience of investing through various market conditions since the 1980s and studying the workings and observations of prestigious investors such as Warren Buffet and Sir John Templeton, we believe Value investing is in a cocoon-like state but is certainly not dead, as many commentators would have you believe. In this respect, looking back at the crises post the 1987 crash, the Millennium bear market and indeed the more recent Global Financial Crisis we see a common pattern. The period following those market corrections and into economic recovery were all led by Value factors. History doesn’t necessarily repeat itself, but it does tend to rhyme!

Looking for a turning point

For Value to stage a comeback however, we believe that there are several factors that need to fall into place. A starting point would be that the economy is not completely humbled by the global pandemic, that we can get through it, and we will in fact endure lasting economic improvement. Of course, history is on our side here and we have always come out the other side of an economic crisis/recession eventually – faith in humankind, perhaps.

The huge level of monetary and fiscal stimulus as a reaction to economic slowdown should be highly supportive in this respect.  Once greater certainty is achieved, either in the form of vaccines or treatment of the symptoms, households and business alike will have greater certainty.  When they get this it’ll kickstart economic activity. If inflationary pressures start to build, the sudden tailwind for Growth investing of falling bond yields may soon reverse.

It is clear that some of the mega cap US tech names which have re-rated substantially will carry on being good businesses, generating consistent revenues with a solid future. But the most successful investors through time recognise that the entry price paid for any financial asset will dictate futures returns. We believe prices being paid today for some Growth stocks in a momentum driven market are rich indeed. Similarly, we do not believe that because many Value stocks contain a degree of cyclicality, they are bad businesses that will lead to poor future returns.

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.

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