Growth companies are those that offer strong earnings growth. Investors are usually willing to pay more for this growth so the stock price tends to be higher than the broader market. They have historically performed better during periods of falling interest rates and when company earnings are rising – an environment we have experienced for the past few years.
Value companies, on the other hand, are those that have fallen out of favour and are undervalued but still have good fundamentals. Companies in industries that are more cyclical in nature tend to fall into this category and they typically lag in a sustained or strongly rising stock market.
However, improving returns from value stocks have historically been linked to a strengthening economic backdrop – or at least a perceived one – which in turn gives investors the confidence to expose their portfolios to more domestic names.
While ‘growth’ has outperformed ‘value’ in the past few years*, the performance gap between the two styles has now narrowed.
It began on a global scale during the second half of last year, when pro-fiscal US president Donald Trump’s election became the final catalyst for a mass market rotation out of growth and into value.
So given Brexit-related uncertainty, a volatile sterling and the widening gap between inflation and wage growth, why are value stocks starting to catch up with their ‘stalwart’ counterparts? Are rising bond yields and potential interest rate hikes enough to keep the UK economy marching upwards, or should investors hedge their bets by holding global-facing UK equities?
Here at Chelsea we believe that diversifying your style exposure is as important as diversifying your regional or asset class allocation. The natural tendency over the past few years will have been to invest more in funds with a growth style. So now may be the time to rebalance you portfolio.
An example of a UK value fund that we like, for instance, is Schroder Recovery fund. It aims to provide long-term growth through stocks the managers deem to be significantly undervalued relative to their earnings potential.
For instance, the managers are overweight UK banks compared to their FTSE All Share benchmark, as they believe a negative sentiment overhang from 2008 is unfairly impacting valuations. Examples of some of the fund’s largest holdings include HSBC, Standard Chartered and RBS.
While Schroder Recovery has comfortably beaten its average peer and benchmark over the last five years with gains of 96.53 per cent**, the managers’ deep value approach may mean it is better suited to long-term investors with some appetite for risk. Other UK value funds we like include R&M UK Equity Long Term Recovery, Man GLG Undervalued Assets and, on the investment trust side, Fidelity Special Values.
For those seeking an investment vehicle on the opposite end of the value/growth spectrum, City of London investment trust has a long track record of achieving steady growth and regular income pay-outs. In fact, the investment trust is one of a very small handful in the AIC universe to have increased its dividend yield annually for more than 50 years***.
The manager describes his personality as “conservative”, which he says is reflected in his portfolio’s positioning. When selecting stocks, he looks for companies with sustainably competitive business models. The core of his portfolio consists of multinational consumer staples brands such as British American Tobacco, Diageo and Unilever.
Over five years, the trust – which is trading on a 2 per cent premium to net asset value***- has returned 67.55 per cent compared to its average peer and FTSE All Share benchmark’s respective returns of 71 and 52.74 per cent**. Other attractive UK funds which invest in high-quality stocks include Evenlode Income, Fidelity Enhanced Income and Rathbone Income.
*Source: FE Analytics – MSCI United Kingdom Growth vs MSCI United Kingdom Value indices in 2017, as at 08/10/2017
**Source: FE Analytics, as at 08/10/2017
***Source: The AIC, as at 08/10/2017
Please remember, no news or research item is a recommendation or advice to buy. Every Investor is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment for your circumstances please contact an adviser. All investments can fall as well as rise in value so you could get back less than you invest and tax policies may change.