2016 saw a significant style reversal in equities with value outperforming the quality growth stocks across all the regions. History and academic research provide evidence that value is the top performing strategy in equities worldwide over the long run. There are two notable exceptions to this very consistent trend: the “tech bubble” in the 90’s and the post 2008-crisis. Recently, the rationale for a reversal in favor of value has been well documented by asset allocators: spreads in valuations between value and growth stocks, the transition to higher or at least stable interest rates environment among others.
We think time has come to revisit the value funds for potential switches in equity portfolios. But why now and why do we think it is worthwhile to reconsider value in the near future?
Crowded trade
Growth funds have benefited from investor’s appetite in the recent years and they became a consensual trade, rightfully given the divergence in returns with their value peers. But there are rising concerns about the size of growth funds and the potential impact in case of significant outflows. Within the Europe ex-UK equity peer group, value funds only represent 8% of total assets and they appeared to be more immune to any reversal or unwinding of long-held growth positions.
Investor positioning
Again, most investors rode the wave of the quality growth trend in the last years and positioned portfolios accordingly. So, if investors want to add value in their fund selection with a forward-looking view, they should focus attention, time and research efforts to play mean reverting in favour of value.
Search for selectivity
Most value funds really struggled before 2016 and it is important to assess the consistency of the processes, the potential style drift during adverse scenarios, potential “value trap funds”, and their ability to capture upside potential. For outperformers in 2016, it is also essential to assess whether the fund’s returns are derived from the beta of value sectors or real alpha generation through sound stock picking in the value space. Overall valuations are not compelling and Portfolio Managers find it difficult to identify real value stocks across the opportunity set. We are then paying attention to the deep value managers that really dig into the cheapest stocks in their respective investment universe and blend them with more traditional relative value strategies to address the full spectrum of value funds.
The challenge of quant data
To some extent, most investors rely on past data to assess consistency of Portfolio Managers, this can be useful if the fund has enough track record and if market’s trends are themselves stable and recurrent. But quantitative analysis provides poor guidance at market’s inflection points. Sooner or later, value funds will retain investor’s attention, meaning that they will be “forced” to buy funds with historical questionable track records and/or underperformers of the past five years. Experience and qualitative analysis of active stock pickers will then be a valuable input to find the value winners, among those disappointing track records.
It cannot be emphasised enough that past performance is no guarantee of future performances, and particularly where markets go through inflection points