Despite the recent rally in value stocks and decline in growth stocks, now is not the time to take concentrated bets on either investment style, according to Craig Baker, manager of the £3.1bn Alliance Trust.
Whilst he anticipates 2021 should be a positive year overall for equities, Baker believes it is vital to have a diversified portfolio that is focused on stock selection.
“Given the amount of uncertainty still ahead of us, we believe now is not the time to take concentrated bets on particular countries, sectors or investment styles,” he said.
Baker, who is also global chief investment officer at Willis Towers Watson, said if investors take significant country bets, they are taking on uncertainty surrounding which countries are going to come out of lockdown quicker than others.
“We can obviously look at epidemiology, we can look at vaccine rollout, and we can look at stimulus, but we have no idea if a mutation suddenly occurs in one country versus another,” he said.
“It's very difficult to do that purely on fundamentals. I think you're taking a bit of a punt really if you're taking big country positions.”
Similarly, Baker suggested it would be unwise to take big sector bets going into an environment where governments will be seeking to increase taxes to fund coronavirus-sparked deficits.
This could have implications for technology companies and how much they are taxed, or for heavily polluting sectors and how what carbon emission levies they face.
“It is uncertain as to what will happen with changing government policy around taxation which could hit certain industries more than others,” he explained.
“Would I want big bets on sectors when something genuinely could change quite dramatically? Probably not.”
When it comes to investment styles, it has been a quite painful ride for any manager that's had a value bias, even if it's been a mild value bias, over the last decade or so.
Baker said: “Could that continue? Yes. Could we see a massive reversal? Yes. Would I be nervous if I had a growth manager that's outperformed by 100 per cent? I'd probably be a bit nervous.
“But if I was a value manager, would I be 100 per cent confident that there's going to be a massive reversal? Well, no I wouldn’t be 100 per cent confident either.
“Just looking at where we are at the moment, there are so many unknowns that are out there on the virus, and the reaction to the virus from different political regimes, some of which are brand new.”
In recent weeks, Alliance Trust has seen a boost in relative performance off the back of value outperforming growth. It has recently jumped to the top quartile of the global investment trust sector.
Performance of the trust year-to-date
Source: FE Analytics
However, despite the recent rally, Baker said that the Alliance Trust portfolio isn’t necessarily tilted more towards growth or value but has a balance between the two. He emphasised returns come from stock selection from the eight managers who run portfolios for the trust.
“There's a lot of companies that actually haven't been hit that hard from an earnings perspective by Covid,” he said.
“In fact, some of them have been doing a lot better than the market at large, but that hasn't yet been reflected in their share prices.
“So we don't think that the recovery that's been seen in the market index has been as broad and across all parts of the market. Once that broadens out you could easily see some very strong outperformance from this portfolio.”
Any investor who doubled down on the five big US tech companies last year would have generated significant outperformance.
Looking back at the total return of the MSCI World index for 2020, almost half of the index’s returns came from just five companies: Facebook, Apple, Amazon Microsoft and Google parent Alphabet, otherwise known as the FAAMGs.
The impact of the FAAMGs on MSCI ACWI’s total return (%)
Source: FactSet, MSCI and Willis Towers Watson
However, Baker doesn’t believe the narrow leadership of these large-cap technology stocks that has dominated markets over the last few years will continue.
“I think the FAAMGs can obviously continue to do well, but the idea that they continue to completely dominate and grow and become 30 to 40 per cent of the index is pretty unlikely,” he said.
“It's never happened before. You've had periods where you have had high concentration, like the Nifty 50 and the like, but there are so many unknowns out there.
“You’ve now got a Biden administration rather than Trump administration, so who knows whether that means there'll be different antitrust laws or new taxes for tech companies? You could have the threat of inflation, and rising yields over time, which obviously is worse for growth stocks than it is for value-oriented companies and there's all sorts of reasons why that could reverse.
“We're not saying is that those five companies are suddenly going to perform very badly, but the idea that they can continue to be 40 or 50 per cent of the return on the entire market for the next few years is just so extraordinary unlikely.”
Over the last five years, Alliance Trust has delivered a total return of 101.98 per cent versus 105.96 per cent from the average peer in the IT Global sector and 91.13 per cent from the MSCI All Companies World index.
Performance of the trust over the last 5yrs
Source: FE Analytics
The trust is trading at a 5.99 per cent discount to net asset value (NAV), yields 1.55 per cent and has ongoing charges of 0.65 per cent.