Growth has outperformed value for more than a decade, but the development of an effective vaccine could herald a major turning point.
According to recent analysis by the broker Numis, over the last ten years the growth stocks in the MSCI World benchmark have outperformed their value counterparts by just under 100%. In the UK the figure hit 70%, before the news about the vaccine prompted a reversal that saw it fall back to 50%.
Growth stocks are those that are expected to grow at a rate significantly faster than the market as a whole, whereas value stocks appear cheap relative to the company fundamentals. The outperformance of growth over the last decade has been fuelled by the historically low interest rates that are used to discount the future cash flows.
It was given a further boost by the lockdown, which accelerated the adoption of technology across all facets of life, with tech stocks falling firmly in the growth camp, but the situation could be about to change. If the vaccine enables economies to grow and inflation and interest rates to rise, then value should come back into fashion.
Global value and growth
Numis point out that the global investment trusts with the purest exposure to growth are those managed by Baillie Gifford such as Scottish Mortgage (LON:SMT) and Edinburgh Worldwide (LON:EWI). This favourable positioning has helped them to dominate the performance table with five-year share price returns of 309% and 244% respectively.
The more income-oriented investment trusts typically have a value bias as these stocks tend to have the bigger dividend yields. Those most exposed to the core value approach include EP Global Opportunities (LON:EPG) and the Scottish Investment Trust (LON:SCIN) with lacklustre five-year share price returns of 25% and 40% respectively.
Despite the huge disparity in returns, Numis did not find many significant shifts in the style exposure over the course of the year, which reflects the fact that managers tend to stick to their investment approaches. There have however been a number of enforced changes with the UK value managers at Temple Bar (LON:TMPL) and the Edinburgh Investment Trust (LON:EDIN) both being replaced by their respective boards after prolonged periods of poor performance.
UK value and growth
There are less out-and-out growth strategies amongst the UK investment trusts because of the composition of the market, which has a high exposure to oil & gas, miners and banks, whereas technology accounts for a relatively small proportion. This value bias along with the risk of Brexit explains much of the underperformance relative to the international indices.
Once again the standout growth option is a Ballie Gifford fund, Ballie Gifford UK Growth (LON:BGUK), with a five-year share price return of 54%. Most of the rest of the sector consists of equity income mandates that favour higher yielding value stocks.
If you think the development of a vaccine – and possibly a favourable resolution to Brexit – will bring about a recovery in UK value stocks, then Numis recommend Fidelity Special Values (LON:FSV). Its manager Alex Wright has built up a strong long-term record by investing in stocks with catalysts for change that are unappreciated by the market, with the fund generating a five-year return of 28%.