During the decade or more of low interest rates, growth stocks outperformed value by a significant margin and it wasn’t until late 2021 that the trend reversed. It is possible that the prospect of rate cuts will help these different investment styles to rotate again, although it is too early to know for sure.
The broker Numis thinks that central banks may be wary of cutting interest rates prematurely, given the risk of unleashing another round of inflation. If they are right, there is a good chance that fund returns may be driven more by company specific performance than their style characteristics.
In this sort of environment both growth and value managers have the potential to outperform if they can pick the right stocks. Because of this, Numis believe that there is an opportunity to acquire some well managed growth trusts at a discount. These have the potential to deliver attractive returns following a sustained period of being out of favour.
The broker’s first pick is Scottish Mortgage (LON: SMT), Baillie Gifford’s flagship fund that is generally seen as a bellwether for growth investing. They say that its unique portfolio has the scope to deliver regardless of the interest rate environment, so the current sell-off should be seen as an opportunity.
SMT aims to invest in the best growth companies from around the world and has around 30% of its assets in unlisted stocks. Numis think that it is this private component that could serve as a catalyst for an improvement in sentiment, with major holdings like Northvolt rumoured to be considering an IPO in 2024 and speculation that SpaceX could spin out its Starlink satellite business.
There were times last year when the discount hit 20%, although it has since narrowed back to 11%. Numis describe the current valuation as an attractive opportunity given its unique portfolio and long-term approach, but you would need to be comfortable with the volatility before investing.
The broker’s second selection is Terry Smith’s Smithson (LON: SSON) that they think offers value on an 11% discount. It has historically traded on a premium and there is a share buyback programme in place that should limit the risk of any further widening.
SSON holds a concentrated global portfolio of around 30 quality small and mid-cap growth stocks. These consist of businesses with strong competitive positions and robust balance sheets that can sustainably generate high margins.
The portfolio currently trades at around a 48% discount to its 10 year average forward PE ratio and a 27% discount to its historic PE. Numis believe that this represents a reasonable price to acquire quality growth assets.
Another opportunity that they highlight is Chrysalis Investments (LON: CHRY) that provides exposure to later stage private companies with long-term growth potential. It has really struggled and the shares are currently available at around a 44% discount to NAV.
The trust is managed by a team from Jupiter Asset Management and it is selling pressure from the firm’s open-ended funds that has forced the price so far below the value of the underlying assets. Numis says that this process has now largely cleared and the key to sentiment going forwards will be achieving successful exits.
Chrysalis has recently announced an upcoming disposal that would add 4.1% to NAV and allow the Board’s new capital allocation programme to kick in. The proceeds would be used to build a prudent cash reserve of about £50m, which would allow 25% of net cash profits to be distributed to shareholders via buybacks. The broker says that such a transaction would be a big step in the right direction.