Investors that bought and held value stocks at the start of 2016 have seen superior returns than those that held growth stocks, according to research by FE Trustnet.
Data from FE Analytics shows that in the UK, Europe and the US, as well as the broader MSCI All Countries World index, value stocks have outperformed their growth counterparts since January 2016.
As the below chart shows, the MSCI AC World Growth index has returned 37.71 per cent compared with a gain of 39.12 per cent for the MSCI AC World Value index.
Table of index returns since 1 January 2016
Source: FE Analytics
Meanwhile, the MSCI North America Value index is 83 basis points ahead of its growth counterpart and the MSCI Europe ex UK Value index is 6.4 percentage points better off than its sister index.
The biggest dispersion is in the UK, where the MSCI United Kingdom Value has return more than double the MSCI United Kingdom Growth index (16.6 per cent versus 32.4 per cent).
Patrick Connolly, head of communications at Chase de Vere, said: “There are additional factors that we have had in the UK and Brexit is a key factor because what we’ve seen since the EU referendum result has been a huge devaluation in sterling.
“That has impacted some companies more than others regardless of whether they have a value or growth span but far more in terms of where their earnings come from.”
However, analysts are broadly mixed on whether investors were right to buy and hold value stocks over growth stocks since the start of 2016, despite the outperformance.
Among those who think investors were right to invest in value stocks is Darius McDermott, managing director of Chelsea Financial Services. He said not enough investors caught last year’s value trade and more should now add to their positions for another rotation in the short-term.
“Value is a much-unloved strategy. So much so that just 11 per cent of all global equity funds now has a value focus,” he said.
“Investors – and companies – have given up on it, arguably just at the wrong point. We think that now is exactly the right time to add some value to a portfolio.”
Indeed, Lazard Asset Management’s Alan Custis explained earlier this week why a rotation back to value stocks may occur.
The main reason for a market rotation outlined by Custis was the tightening of monetary policy and raising interest rates by central banks around the world. He said such actions would put a squeeze on quality growth companies and aid more cyclical areas such as banks, as well as an expected rebound for commodity prices.
“Everyone is in denial on the rotation, but I think the rotation into cyclicals, value and/or economic growth-related names is happening,” the manager of four FE Crown-rated Lazard UK Omega fund, said. “It seems to be as clear as mud that that’s what the market is going to do.”
However, not everybody agrees that a rotation is on the way. Hargreaves Lansdown head of investment analysis Richard Troue said conditions had changed since last yeara market rotation in the short term.
He explained: “We have had a good commodities rebound as the fear over slowing growth in China dissipated – so we saw a lot of those stocks rebound and that has played to a large extent now for the short term, I think.
“Also, post-Brexit and post-Trump being elected, I think a lot of people have realised that the world is perhaps not set to change dramatically in the short term, so they have switched back to those types of companies that are perceived to provide more dependable growth.
“I do not see a catalyst for that to change in the short-term. I don’t think we are going to see a massive change in monetary policy – I think rates are going to stay relatively low – and it is difficult to see what might cause investors to change back to those value-type stocks wholesale again like we saw during 2016.”
Troue said investors should continue to hold value names as part of a balanced portfolio and look to tilt their positions when appropriate.
“Any well-diversified portfolio should have some exposure to both growth stocks and value stocks to smooth out volatility and probably give you the best chance of a portfolio that does reasonably well over the long term,” he added.
“Ultimately, timing that switch into value and out of growth is going to be very difficult – practically impossible – so I doubt going back to the start of 2016 that there were many investors that managed to jump ship from those growth stocks that had been doing so well into the more value-focused names.”
Indeed, 2016 was the first calendar year since 2008 in which the MSCI AC World Value index outperformed its growth counterpart – though there have been many ‘false dawns’ where it appeared that the value style could be due a comeback.
Performance of indices over 10yrs
Source: FE Analytics
“There is nothing wrong with varying your exposure to different styles of investment. So, after value has been out of favour for a long time and if you do see a bit of a rotation coming in the market, there is nothing wrong with either taking a little bit of profit from the growth holdings and rotating into the value stocks,” he added.
“I’d say it is more a case of making marginal adjustments to a portfolio rather than wholesale changes.”
Chase de Vere’s Connolly agreed, noting that he does not make big calls on the value versus growth argument because there will always be periods when one outperforms the other.
“Although we might take a slant one way or another we would typically hold both value and growth investments and hold them for the longer term,” he said.
While the data above shows investors would have been right to invest in value in January last year, they were also wrong, he argues.
“They were right to make that move, but actually should have moved back into growth in the meantime,” he said.
“They were right in terms of the initial call but actually they would have had better returns if they would have gone in value and then at some point moved back into growth again and that is the problem with trying to make these calls.”
Performance of indices since 1 January 2016
Source: FE Analytics
Indeed, as the above chart shows, world value stocks pulled away from their growth counterparts in the second half of 2016 but since the start of the new year have lagged.
“For some time now, many experts have said that value is going to bounce back and many investors would have moved into value too soon while others would have moved too late and lost out as a result.”