Blue Chip Issue 81

OFFSHORE
Performance of growth vs value
Do you think value can ever make a comeback?
Value companies outperformed their growth counterparts
before the global financial crisis in 2008, supported by a
booming global economy and a continued de-rating of growth
stock valuations from the very elevated levels achieved at
the height of the dot.com bubble in late 1990s. But the tepid
economic growth environment after the 2008 crisis favoured
growth companies, as investors were willing to pay up for
scarce growth.
As a result, the valuation spreads between value and growth
companies have once again reached close to extreme levels.
Add to this a strong global economic recovery and better
fundamentals and growth forecasts for value companies, and
we could see market sentiment continuing to support value
companies going forward. I think the question around the
length of the current market sentiment is a valid one, but very
difficult to predict.
Within this long outperformance of growth over value,
however, there have been mini cycles. Even over the past year,
there were periods when value outperformed, particularly after
news of successful vaccine trials broke in November 2020.
Therefore, diversification across investment styles is
important, particularly in the global equity universe, where
these factors are much more prevalent than locally. This is
because the breadth and depth of global equity markets
allow managers to express their preference for a specific
investment style without increasing the risk resulting from
undesirable concentration levels in their portfolios. With the
small number of companies listed on the JSE, this approach
becomes more challenging.
What about quality as a style?
I should add that different investors
will have slightly different ways of
classifying companies, but broadly
speaking, “quality” is an investment
style where investors focus on
companies with strong balance
sheets and competitive advantages,
such as having very well-known
consumer brands.
These shares tend to be more
defensive in nature, which means
that they hold up better than the
broader market during a selloff, which
is what we experienced during the
March 2020 market drawdown. In a
market environment dominated by
an uncertain future, investors tend to
support the predictability and visibility
of annuity-type earnings streams
characteristic of quality companies.
On the other hand, such companies
tend to lag during subsequent market
recoveries, as investors turn their focus
to areas of the market that are likely to do well in an economic recovery.
How should a typical investor view all these various styles?
Should you jump between them, or just pick one and stick to it?
I don’t think one can successfully time when a particular investment style
will come into favour or fall out of favour, as these shifts in performance
trends tend to only become apparent with the benefit of hindsight.
Moreover, being caught on the wrong side of that trend could be
detrimental to relative performance, given the length of such cycles.
Therefore, our approach in the global equity fund is to combine fund
managers whose investment philosophies and processes tend to be
broadly underpinned by different investment styles.
But I also don’t think that managers need to be purists and cling
dogmatically to a specific investment style, as we acknowledge
that markets dynamics can change over time, and we wouldn’t
want them to miss out on any potential investment opportunities.
So, in our research we look for managers who stick to their knitting
and apply their process consistently over time rather than chase
the latest market fads, but who can also be quite pragmatic in their
investment approach.
Ultimately, we spend most of our time making sure our portfolios
are properly diversified and balanced so that we are not dependent
on the performance of any one style or market cycle.
South Africa is an emerging market. Should South African
investors have a separate allocation to emerging market equities,
or is that doubling up on risk?
I think a separate allocation is warranted and we have emerging
market (EM) specialist managers in our global equity fund.
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