Norris, who heads up a number of top-rated portfolios including the Ignis Argonaut Pan European Alpha fund, points out that the most successful managers of recent years have typically been those who have focused on defensive growth companies with strong balance sheets and good cash-flows, which have coped well with the various crises that have plagued markets. This has pushed the valuations of these companies, which include the likes of Diageo in the UK and Nestle in Europe, to elevated levels. With economic data suggesting a sustainable recovery across the vast majority of regions, Norris (pictured) believes these inflated prices are now at risk of correcting, which is why he is moving his assets into more cyclical value names.
"In the last four years or so it has been possible to make money in Europe without being particularly bullish on it, by investing in solid companies with international exposure," he said.
"However, I think the time has come to shift away from the 'nifty-50' quality growth companies which have seen a big re-rating, and into those that are more geared towards the domestic market."
"If Europe does recover, I think you’re going to see value stocks outperform growth stocks by some distance."
Norris labels these kinds of stocks as the "dirty 30" – the antithesis of quality "nifty 50" stocks that tend to hold up well during market turbulence.
While Europe is his obvious point of interest, Norris says the same trend is happening throughout the developed world, including the UK and US.
"In the last four years, it’s been great to be a growth investor, and pretty terrible to be a value investor," he said. "A lot of the average companies just got cheaper and cheaper, while the quality companies just kept going up and up."
"Now, I think there is a big opportunity to switch. I think we’re at the next big inflexion point."
Norris explains that there are three major inflexion points occurring at the moment: the switch from emerging markets into developed markets; the switch from debt into equities; and finally the switch from growth into value.
While many managers categorise themselves as having either a growth or value style, Norris focuses on earnings momentum when picking companies, which allows him to switch between the two styles depending on where he sees the most value.
In recent years, the manager has been overweight growth stocks, which has massively benefited performance; our data shows his five crown-rated Ignis Argonaut Pan European Alpha fund is a top-quartile performer in its sector over five years, with returns of 57.24 per cent.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The fund has also been less volatile than its sector and benchmark over the period, and protected more effectively on the downside in the market sell-off in 2008.
However, given his concerns about valuations, Norris explains he has recently been moving into more value-orientated stocks.
"Europe seems to be the last recovery story – southern Europe and the banks are the most obvious plays," he said.
"European macro has been very positive recently and GDP growth is looking a lot better from here on in."
"Average stocks find it easier to generate profits when economic growth improves and we’re seeing some of the cheaper ones on low multiples getting earnings upgrades. On the other hand, some of the really quality names like Nestle are seeing very small downgrades. This is an important sign."
Across his range of European and pan-European portfolios, he has been increasing his bank exposure significantly, adding names such as Royal Bank of Scotland and Lloyds in the UK, KBC in Belgium and Jyske Bank in Denmark.
"We didn’t have stocks in the portfolios for five years because growth in Europe has been so low. We said we’d only change that when economic growth started to pick up, which is what we’ve seen."
The manager says RBS is "a few years behind Lloyds" in its recovery, which bodes well for shareholders given that the latter has returned almost 150 per cent in the last two years alone. RBS, on the other hand, is up 58.19 per cent.
Performance of stocks over 2yrs
Source: FE Analytics
While Norris says the inflexion point may have started earlier for the US and UK, with value stocks such as Lloyds showing signs of life for many months now, he does not think it is too late for investors to switch their holdings.
"In the last 10 years, it’s been the non-domestic UK stocks with international exposure that have done well; why can’t the opposite of that happen for seven or eight years, or more?"
"There are good reasons why Lloyds won’t go back to the same price that it was in 2007 any time soon, but you’ve got to remember it’s still a low way down from that point."
Performance of stocks over 6yrs
Source: FE Analytics
Norris says he prefers to run a portfolio that can draw on both value and growth styles of investing so that he can outperform across the entire market cycle.
"If you’re going for just one fund in an area that is specialised, you’ve got to make sure you’re very sure that either a growth or value style will perform best," he said.
With this in mind, in a new series starting later this week, FE Trustnet will look at funds across a number of different IMA sectors that could benefit from the better performance of value stocks if Norris is indeed right, as well as those with a growth focus, which could suffer.
