After several years in the shadows, value investing is making a comeback.

Now well into 2021, it looks like the so-called growth-to-value rotation has finally arrived. Many investors avoid last year’s winners in favor of previously unloved ones.

But is rotation here to stay? And what does this mean for investors?

A story of two halves

2020 has been an extraordinary year for many reasons.

The coronavirus pandemic has caused significant disruption and the cost to the economy has been high. We are likely to be preparing for a recovery over several years, if not decades.

The impact of the virus on the stock markets was impossible to predict. After a rapid drop in stock prices in February and March, global markets have since recorded a remarkable recovery. But it was not a one-way street for all companies.

The Covid-19 has accelerated trends that were already in place as the pandemic approached. Notably digitization and our increased reliance on technology, which had already accelerated in the years leading up to 2020. But last year the pace picked up. Social distancing and home support initiatives have pushed businesses to strengthen their online presence, with growing demand for online entertainment, games, grocery deliveries, and other retail purchases.

As a result, many companies that expected higher earnings growth in the future performed well. Tech stocks were the most obvious example. Funds more invested in tech, or the US stock market, which is home to world-class tech companies, have performed well in this environment.

On the other hand, it could be argued that value stocks were already at a disadvantage before embarking on the pandemic.

These often unglamorous companies are, as their name suggests, known to offer value. The basic principle is that their shares can be bought at a price that does not reflect the potential for future profits of the company. In other words, they are “cheap”.

Companies that tend to rely on strong economic growth for their survival, such as banks and oil companies, have already fallen into this camp. The virus threw a real wrench in the jobs and hampered their ability to improve their profits.

Why a rotation now?

The stock has gone through significant periods of underperformance in the past, only to make a comeback. What is different over the most recent period is the extent of the underperformance relative to growth stocks.

Last year in the United States, the world’s largest stock market, the level of underperformance reached a level that had only been reached once during the Great Depression of the 1930s. Many believed that ‘It wouldn’t be long before the elastic band snaps back into place.

Chart showing global annualized returns in value versus rolling 5-year growth (1926-2021)

Source: Calculated from Kenneth French’s data website, July 1926-April 2021.

Although it hasn’t been that long, so far this year the value has picked up. But why?

Vaccine deployments and the potential to reopen economies and consumer craziness have recently seen investor sentiment shift. The possibility that central bank stimulus measures and the economic recovery could lead to higher inflation and interest rates at some point has also had an impact. Higher interest rates reduce the value of future cash flows, putting pressure on growth stocks that are expected to generate larger profits tomorrow, not today.

For some investors, the value-growth debate is not so clear. For starters, there are different types of value investing – some investors are looking for companies that look cheap because they are in an underprivileged industry.

Others look for companies in any industry that have been through a period of mismanagement but are ready to recoup their profits. Plus, many growth investors say they’re looking for value as well – after all, all investors want to do is invest in stocks that are currently worth less than they will be in the future. .

But it is the mismatch in performance of different stocks that tells us that there are different styles of investing. Whether you call it value, growth, or something else, different styles work well at different times. This is why diversification should be at the heart of any investor’s toolbox.

What does this mean for investors?

It’s no surprise that growth funds were some of the most popular last year, given the strength of returns. It’s all well and good if you jump on the train early enough. But it can be painful if you’re the last to walk through the door and the trend has already started to turn.

The important point here is that the markets are not a one-way bet. They are cyclical, and history tells us that. For example, prior to the last few years, the performance of some growth-oriented funds was more moderate or less constant. But it’s often easy to forget about it when you’re just focusing on the here and now.

This does not mean that these funds will not be successful in the future. There are many talented growth fund managers with exceptional long-term track records. But it would be foolish to think that dizzying short-term gains can simply be repeated year after year.

In recent months, many value funds have done much better. Some of these funds are managed by good managers, but in recent years they have faced challenges with their investment strategy. It should not be forgotten that some of them are experienced managers. They have been through a plethora of events in the past and could be in a good position to do well in the future, although there are of course no guarantees.

It is important to note that this is not an attempt to call the end of growth or the permanent return of value. There are reasons to suggest that the growth could persist. Many of these companies rely on innovation and a competitive advantage for their growth, rather than on what is happening in the economy. We could see these companies go further if the current wave of disruption continues.

No one can predict the future, and even value investors can’t predict exactly what will happen next. Just see how unpredictable 2020 was. We remain in uncharted territory.

This is precisely why investors should not have their portfolios pointed in one direction. If he leans entirely towards an investment style, he will only succeed when that style is in vogue. It can be painful when it is not.

The table below shows how two different styles provide two different performance profiles, but both can be effective.

Both funds invest in Japan. But the manager of FSSA Japan Focus invests in companies that are expected to grow their profits sustainably over the long term. Man GLG Japan manager CoreAlpha is a contrarian investor, looking for undervalued and unloved companies with potential for recovery. Both have teams behind them with good long-term records, although that doesn’t guarantee their performance going forward.

Past performance is no guarantee for the future. Source: Lipper IM, as of 03/31/2021.

Annual percentage growth
March 16 –

the 17th of March
The 17th of March –

March 18
March 18 –

March 19
March 19 –

March 20th
March 20th –

March 21st
Men GLG Japan CoreAlpha 47.4% 1.8% -2.0% -19.2% 29.2%
Focus FSSA Japan 23.1% 25.8% -2.8% 10.1% 37.6%

Past performance is no guarantee for the future. Source: Lipper IM, as of 03/31/2021.





It is impossible to call what will happen next in the stock market. And, while diversification can take many forms, it is important. We believe the best approach is to invest with fund managers who have a variety of strengths, styles and areas of interest, including different geographies and sectors. There is no one right way to invest, but diversification is a good start.

This article is not personal advice. If you are unsure whether an investment is right for you, be sure to seek advice.

How they might fit into a portfolio

Focus FSSA Japan

This fund aims to grow your investment over the long term. Managers look for high quality companies that are dominant in their industries. We believe this could be a good option for exposure to Japan within a global portfolio. Its focus on high quality companies means it could work well alongside another fund focused on Japanese companies that have been through a rough patch, but with potential for a recovery. He invests in relatively few companies, which means that each can contribute significantly to returns, although this is a higher risk approach. The flexibility of managers to invest in derivatives also adds risk.

Men GLG Japan CoreAlpha

This fund aims to grow your investment over the long term. Managers’ contrarian approach is often referred to as “value investing”. Their discipline in buying underprivileged businesses and reselling them as they are taken over sets them apart. They tend to invest in a relatively small number of companies, which means that each can make a significant contribution, but this increases the risk. We believe this fund could work well in a global equity portfolio designed to provide long-term growth. Its focus on large companies means it may well sit alongside a Japanese equity fund focused on midsize or smaller companies.

Visit the funds section of our website to learn more about these funds, their risks, fees and to read their key investor information documents.

Investing in these funds is not for everyone. Investors should only invest if the fund’s objectives are aligned with theirs and there is a specific need for the type of investment being made.

Investors should understand the specific risks of a fund before investing and ensure that any new investment is part of a diversified portfolio.


Explore our Investment Times Spring 2021 edition for more articles like this.

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