Value. A sleeping giant?
Posted by: Brian Dennehy
In the last couple of weeks, we have looked at the huge potential in Value-style funds when “The Great Rotation” happens (see links to our most recent Value blogs at the end). Here we take a step back to look at how we got to where we are, and some examples of the massive splits between the Growth and Value styles that we have witnessed in the recent past.
The battle between Growth
investors is perpetual. Since 2008 Growth
has been the massive winner. In this recent blog
we track what’s happening now in the split between Growth
in a number of sectors. This isn’t forecasting. We’re monitoring the changes so we can see when movement starts to occur, indicating a possible change in leadership.
In the following charts we are going to show you:
how the performance of Growth and Value varies considerably in some periods…
and the opportunity if you get it right.
First, a quick recap. Growth investing involves buying shares of companies exhibiting above average growth in profits even if the share price might appear expensive – in other words they tend to ignore the valuation.
In contrast, Value investing isn’t simply buying what is cheap, as a company might have a low share price for very good reasons. Rather it is buying what is cheap without there being any good reason for it being cheap.
Here is the overview, using global Growth (red) and Value (blue) indices since 1997.
Chart 1 – World Growth and Value indices, price-only (1997-2020)
You can see red Growth beating blue Value by a wide margin in the Tech Bubble build up and again from January 2015. Following the bursting of the Tech Bubble, Value was less bad on the way down (to 2003) and then outperformed Growth persistently from 2003 to 2008.
Now we are going to focus in on the build up to the Tech Bubble, looking at global indices first and then the U.K. In the first global chart you can see a huge differential between the two styles – with Growth generating twice as big a return as Value over those three short but wild years.
Chart 2 - World Growth and Value indices, price-only (1997-2000)
Turning to the UK in the chart below, the differential is clear but not as spectacular in those same three years.
Chart 3 – UK Growth and Value indices (1997-2000)
The differential for UK-based investors in those bubbly years was much starker if you consider two popular funds, then and now – Henderson Global Technology and Schroder Recovery – see chart below. The Henderson fund had all the Growth-y tech stocks while the Schroder fund is a specialist seeking out Value stocks.
377% versus 37%!
Chart 4 - Henderson Global Technology and Schroder Recovery (1997-2000)
Staying with the UK, after the bubble burst from December 1999, both Growth and Value indices fell in the subsequent 3-year bear market. The differential was not very wide at an index level – at worst, Growth was down 52% compared to Value, down 48%.
But it is again a much starker difference if we bring specialist funds into the equation. In the chart below we show those two specialist funds again. The Schroder Recovery fund is down just 9%, but the Henderson fund collapsed, down 76.7%.
Chart 5 – Henderson Global Technology and Schroder Recovery (2000-2003)
In the four years from the low in 2003, Value had a great run. The Value index was up 91% vs, 70% for the Growth Index. Impressively, Schroder Recovery was up 181%, nearly twice the Value index.
Clearly if you can identify a good point to buy then the payoff is outstanding.
Chart 6 - Schroder Recovery and UK Growth and Value indices (2003-2007)
From that peak in 2007, Growth and Value both fell through the Great Financial Crisis, which bottomed in March 2009. This is shown in the chart below, which also shows the Schroder fund.
Chart 7 - Schroder Recovery and UK Growth and Value indices (2007-2009)
From that low Growth has had a good run. The Growth index is up 121% compared to 26% for the Value index from 2009 to 2020. Impressive enough, but it is the Schroder fund which showed the Growth index a clean pair of heels – up 202% from that 2009 low, including the steep falls earlier this year. All this is shown below.
Chart 8 - Schroder Recovery and UK Growth and Value indices, total return (2009-2020)
For completeness, here are the equivalent numbers for the Global indices from 2009 to date.
Growth (up 370%) has outperformed Value (up 127%), and as you can see Growth really took off globally from 2014.
Chart 9 - World Growth and Value indices (2009-2020)
In conclusion, clearly when one or other style dominates, this tends to persist for several years.
More interestingly, and what will surprise many academics and the passive-obsessed, is that a fund with a very clear Value management style, applied with great discipline, can outperform in all seasons – Schroder Recovery.
Putting that Schroder fund to one side for now, it is also clear that, despite the negativity around Value-investing in some quarters, buying funds with a Value bias at the right time can pay off handsomely.
The challenge is identifying the right time – otherwise the only benefit might be that your Value
fund is just going down less than everything else. This is what we’re trying to do with our regular monitoring of Growth
-style funds here
We will not try to identify the bottom – no one can do that. But we will try to identify a good entry point.
This section is slightly longer. If you really want to dig in a bit on the Value opportunity, then have a read through the blogs below.
To see all our blogs tagged as “Value
”, just click here