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The great value rotation?

With growth seemingly being pushed aside and value back in vogue, is this trend here to stay and what does it mean for investors?

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

After several years in the shadows, value investing has returned with a vengeance.

Now well into 2021, it seems the so-called rotation from growth to value has finally arrived. Lots of investors are shunning last year’s winners in favour of the previously unloved.

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

A tale of two halves

2020 was an extraordinary year, for lots of reasons.

The coronavirus pandemic led to significant disruption, and the cost to the economy has been high. It’s likely we’re in for a multi-year, perhaps even multi-decade, recovery.

The impact of the virus on stock markets was impossible to predict. After a rapid decline in share prices last February and March, global markets have since staged a remarkable recovery. But it hasn’t been a one-way bet for all companies.

Covid-19 accelerated trends that were already in place in the run up to the pandemic. Not least digitisation and our increased dependence on technology, which had already picked up in the years leading to 2020. But last year the pace picked up. Social distancing and stay-at-home initiatives drove companies to build their online presence, with demand for online entertainment, gaming, grocery deliveries and other retail shopping increasing.

As a result, lots of companies expected to deliver higher earnings growth in the future, performed well. Tech stocks were the most obvious example. Funds with more invested in technology, or the US stock market, which is home to world-renowned tech firms, did well in this environment.

On the other hand, you could argue value stocks were already disadvantaged before heading into the pandemic.

These often-unglamorous businesses are, as the name suggests, deemed to offer value. The basic premise is their shares can be bought at a price that doesn’t reflect the company’s future earnings potential. In other words, they are ‘cheap’.

Companies that tend to rely on strong growth in the economy for their survival, like banks and oil companies, already fell in this camp. The virus threw a real spanner in the works and impeded their ability to improve profits.

Why a rotation now?

Value has been through significant periods of underperformance in the past, only to eventually make a comeback. What’s different about the most recent period is the extent of the underperformance versus growth stocks.

Last year, in the US, the world’s largest stock market, the level of underperformance reached a point that had only been seen once before during the 1930s Great Depression. Many believed it wouldn’t be long before the elastic would snap back.

Chart showing global annualised returns of value v growth on a rolling 5 year basis (1926-2021)

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

While it’s not been that long, so far this year value has made a recovery. But why?

Vaccine rollouts and the potential for economies to reopen and consumers to splurge has seen a recent change in investor sentiment. The potential for central bank stimulus and economic recovery to 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 deliver greater profits tomorrow, not today.

For some investors, the value-growth debate is not quite so clear cut. For starters, there are different types of value investing – some investors look for companies that look cheap because they’re in an out-of-favour sector.

Others look for companies in any sector that have been through a period of mismanagement but are set to recover their earnings. Not only that, lots of growth investors say they’re looking for value too – after all, all investors want to do is invest in shares that are currently worth less than they will be in future.

But it’s the mismatch in the performance of different stocks that tells us different investment styles do exist. Whether you call it value, growth, or something else, different styles perform well at different times. That’s why diversification should form the core of any investor’s toolkit.

What does this mean for investors?

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

The important point here is markets are not a one-way bet. They’re cyclical, and history tells us that. For instance, prior to the past few years, the performance of some growth-focused funds was more subdued or less consistent. But it’s often easy to forget that when you’re only focusing on the here and now.

That’s not to say these funds won’t be successful in future. There are lots of talented growth fund managers with exceptional long-term track records. But it would be foolish to think heady gains in the short term can simply be repeated year on year.

In recent months many value-focused funds have done much better. Some of these funds are run by good managers, but in recent years they’ve faced the headwind of their investment strategy being out of favour. We shouldn’t forget some of these are experienced managers. They have navigated a host of events in the past and could be positioned to do well in future, although of course there are no guarantees.

Importantly, this isn’t an attempt to call the end of growth or the permanent return of value. There are reasons to suggest growth could persevere. Lots of these companies rely on innovation and a competitive edge for their growth, rather than what’s going on in the economy. We could see these companies go further if the current wave of disruption continues.

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

That’s precisely why investors shouldn’t have their portfolio facing one direction. If it’s leaning entirely towards one investment style, it’s only going to do well when that style’s in vogue. It could prove painful when it’s not.

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

Both funds invest in Japan. But the manager of FSSA Japan Focus invests in companies expected to grow earnings sustainably over the long run. The manager of Man GLG Japan CoreAlpha is a contrarian investor, looking for undervalued, unloved companies with recovery potential. Both have teams behind them with good long-term records, though that’s no guarantee of how they’ll perform in future.

Past performance is not a guide to the future. Source: Lipper IM, to 31/03/2021.

Annual percentage growth
March 16 -
March 17
March 17 -
March 18
March 18 -
March 19
March 19 -
March 20
March 20 -
March 21
Man GLG Japan CoreAlpha 47.4% 1.8% -2.0% -19.2% 29.2%
FSSA Japan Focus 23.1% 25.8% -2.8% 10.1% 37.6%

Past performance is not a guide to the future. Source: Lipper IM, to 31/03/2021.





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

This article isn’t personal advice. If you’re not sure if an investment is right for you, make sure you ask for advice.

How they might fit into a portfolio

FSSA Japan Focus

This fund aims to grow your investment over the long term. The managers look for high quality companies that are dominant in their industries. We think it 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 the potential to recover. It invests in relatively few companies meaning each one can contribute significantly to returns, although it’s a higher-risk approach. The managers’ flexibility to invest in derivatives also adds risk.

Man GLG Japan CoreAlpha

This fund aims to grow your investment over the long term. The managers’ contrarian approach is often referred to as ‘value investing’. Their discipline in buying out-of-favour companies and gradually selling them as they recover sets them apart. They tend to invest in a relatively small number of companies, meaning each one can make a significant contribution, but it increases risk. We think this fund could work well in a global equity portfolio designed to provide long-term growth. Its focus on large companies means it could sit well alongside a Japanese equity fund focused on medium-sized or smaller companies.

Visit the funds section on our website to find out more about these funds, their risks, charges and to read their Key Investor Information Documents.

Investing in these funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made.

Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.


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

See all articles

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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