Value investors are finally seeing “green shoots” in a style that has underperformed for over a decade, Russell Investments chief investment officer, Peter Gunning, global CIO for Russell Investments, said last week. In the first of a webinar series replacing the annual Russell NZ conference this year, Gunning said the value factor had flickered into life post-COVID with a “massive reversal” away from momentum stocks over the last couple of weeks.
According to a Bloomberg report last week, the Russell 1000 Value Index (now owned by the London Stock Exchange benchmarking business, FTSE Russell) was up 4.3 per cent since late May, or double the growth variant.
Citing research from Goldman Sachs, the Bloomberg report says that wide “valuation dispersions signal long-term opportunity for value investors… though it may mean a bit of a bumpy ride, as recent market action has shown”.
“Despite the recent value rally, the dispersion of stock multiples is still extremely wide relative to history,” the Goldman note says. “The volatile rotations in recent weeks underscore just how difficult timing that opportunity can be.”
Gunning told the NZ audience that Russell, and the underlying fund managers in its multi-manager strategies, had “leant into value across the board” over the last 18 months.
He said Russell took a “philosophical” stance that good value companies with quality earnings would outperform over the long term. “But at different parts of the cycle value will become more or less attractive,” Gunning said. “Over the last 18 months value has become more attractive.”
Value managers have, however, battled strong growth and momentum trends that Gunning said had been fueled mainly by a handful of large US tech stocks – the famous FAANGs (Facebook, Amazon, Apple, Netflix and Google).
“Moving away from these mega-cap companies to a more diversified portfolio hasn’t helped investors but as markets normalise there will be more opportunities,” he said.
Markets have tended to move up or down in unison in the early phase of the coronavirus volatility, Gunning said, but investors were beginning to see greater dispersion between share prices.
Conditions were shaping up for a “stock pickers paradise”, he said.
“Investors with the right skills will be able to take advantage,” Gunning said.
In the same session, Erik Ristuben, Russell chief investment strategist, said while value had underperformed by 9 per cent over the last few years, growth stocks were “richly priced”.
For instance, he said current Amazon pricing implied the company would grow earnings 30 per cent year-on-year for the next decade. “It might,” Ristuben said.
However, he said growth stocks were more sensitive than value to interest rate increases – as recent upward spikes in the US yield curve had shown. Of course, not all investors buy the value resurrection story.
In a recent client note, Shane Solly, Harbour Asset Management portfolio manager, said the near-term outperformance of value companies was predicated on a sustained economic recovery. “Value style stocks may continue to outperform in the near term as they revert from being at a discount to growth-style stocks. But, in our opinion, this may only be a relief rally in value stocks,” Solly says in the note. But, he said, Harbour, a ‘quality growth’ house, expected ongoing market and economic fragility put the long-term value recovery at risk.
“Also, the degree of discount that value stocks are starting with versus growth stocks is not as low as that seen in other periods where value has subsequently outperformed over a sustained period of time,” Solly says.
Earlier in June, Bloomberg laid out the opposing points as value and growth investors squared off in a renewed outbreak of “one of the most heated debates in quant finance”.
The Bloomberg story notes investors “are butting heads on what comes next for the famed investing style that scoops up stocks that look alluringly cheap”. On the value side of the coin, Cliff Asness of AQR fame and Research Affiliates founder Rob Arnott, are “leading a storied cohort defending the factor’s core foundations with fresh data and research — while detractors attack in kind”, the article says. “Yet even within this community of [value] believers, there’s deep controversy on how to find the premium and whether to time the market,” Bloomberg says.
Russell NZ concludes its post-COVID conference in the new digital format with a series of three morning sessions this week, beginning with another perennial favourite, an analysis of active management, headlined by the group’s director capital markets research, Leola Ross.
– David Chaplin, Investment News NZ