How to profit from the rotation from growth to value

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How to profit from the rotation from growth to value
Master Investor Magazine

Master Investor Magazine Issue 58

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Growth stocks have outperformed their value equivalents for most of the last ten years, but there are signs that this could be starting to change.

A growth stock is a share in a company that is expected to grow at a rate significantly above the average for the market. Many of the giant US tech names fit into this category and they have been responsible for a high proportion of the increase in the main American indices since the financial crisis.

Value stocks typically trade at a lower price relative to their fundamentals and often pay a high yield. A lot of the domestically-oriented UK companies fall into this group and many of them have started to bounce back since the Brexit deadlock was overcome.

Growth performs best when interest rates and bond yields are low. For example, since the start of 2004 the Vanguard Growth ETF, a large cap US growth-stock tracker, has returned 273%, whereas its value equivalent, the Vanguard Value ETF, has increased by just 143%. The same trend can also be seen in other markets.

Change of fortune for UK value funds

It’s probably fair to say that most fund managers that operate in this country are style agnostic and will invest in stocks from both categories, but where this is not the case there has been a clear change of fortune in recent months.

A prime example of a UK value fund is Man GLG UK Income that I covered in depth as the best fund for 2020. Over the last five years it has returned 66% and has experienced a strong rally since mid-August as the risk of a hard Brexit has diminished.

It is interesting to compare its performance to that of the Lindsell Train UK Equity fund, which has a defensive growth style. This has an excellent long-term track record and has returned 82% over the last five years, yet in the previous six months it has lagged behind the Man GLG fund by just over nine percent.

A similar picture overseas

A similar picture emerges if we compare a couple of global funds. Schroder Global Recovery applies a deep value approach to stock selection and even though this style has been out of favour, it has still generated a reasonable three-year return of just under 20%.

One of the most popular and successful global funds is Fundsmith Equity, which has a quality growth bias. Over the last three years it has returned an impressive 56%, yet during the past six months it has lost 0.5% and has lagged the Schroder alternative by three percent.

There are obviously lots of factors at play here and it is not easy to isolate the impact of the different styles from everything else, but there is no denying the change in relative fortunes of these funds in the last six months.

The neatest way to benefit?

We appear to have moved on from quantitative easing to a period of fiscal expansion with governments looking to borrow more money and spend it. If this policy shift takes hold it could lead to higher inflation and rising bond yields with a steepening of the yield curve, which would favour value stocks over growth.

Perhaps the neatest way to benefit would be to invest in the Jupiter Absolute Return fund. It has been a disappointing performer because it has been net short the market in anticipation of a downswing, while also being short growth and long value.

Over the last three years it has declined by nine percent and many financial advisors have lost patience and pulled clients out. A market sell-off – perhaps triggered by rising geopolitical tensions in the Middle East – followed by a rotation from growth to value could result in a dramatic change in fortune for this fund.

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