While much ado is made of the science that goes into fund manager research, real assessment puts comparable weight on the art as well according to investment leaders.
While financials and materials dominated trades leading into 2024, the popularity of other sectors like healthcare and information technology followed generational, and even demographic, lines.
Value renaissance set to continue
The move away from so-called ‘growth stocks’ which began in Q3 2020 is set to continue, with the winter for ‘value investing’ set to thaw according to Colin Graham of Robeco’s Muti-Asset team. Writing in a monthly update Graham highlighted the switch to financials, energy and materials which began once Covid-QE was brought to an end, and then accelerated by the Ukraine-Russia war.
The realisation that higher rates would be required as economies reopened and labor markets recovered towards full employment was central to this important and long-awaited switch. That said, it isn’t all good news, with ‘leadership change’ in bull markets ‘very rare’ with Graham warning “sustained underperformance of the bull market champions could signal tougher times ahead for equity market performance”.
One of the less understood parts of the ‘growth investing’ philosophy is that it is not clearly defined in the majority of cases. “The growth style is a mixture of earnings quality/predictability and business model momentum” says Graham, meaning one growth strategy can differ significantly from the next. On the other hand, “value has a clear approach”, albeit one that doesn’t always work.
“The most obvious downside of value investing is the ‘value trap’ where companies don’t innovate their way out of a ‘dying’ industry, or looking through a sustainable lens, those companies left with stranded assets,” he says.
One of the more interesting evolutions of ‘value’ in recent months has been the significant change occurring within the sectors and companies that are now screening as being cheap. “We can observe that the sectors and industries within the value style change – tech and health care make up 20% of many value funds today”, which will likely come as a shock to many.
An unexpected trend has been the fact that many ‘value’ companies, particularly operating in energy and materials, are central to the climate transition and actually beginning to offer lower carbon footprints than in the past. “The recent leaders of the value style in the more conventional value sectors have environmental footprints that are 50% of their respective global equity benchmarks, and the style is still historically cheap” he says.
“The value winter is thawing, and we are finding the stock-picking universe to be different to those of previous cycles, with investors finding IT and health care names eligible for investment within the value style,” Graham concludes.
