Value stocks are those which investors believe to be temporarily undervalued by the market, but whose fundamental business is sound.Growth companies focus more on increasing revenues and profits, and tend to reinvest the latter in order to expand further. In the wake of the financial crisis and global economic slowdown, growth became scarce.
As a result, many investors were willing to pay big premiums for stocks with the potential for above average earnings growth. As the low-growth environment persisted, so the pursuit of exceptional returns, through international expansion or cornering of niche markets, increased.
One outcome of this has been the rise in some technology share valuations to levels seen before the dotcom bust. That said companies such as Facebook and Twitter have seen their share prices drop post IPO after results failed to match expectations.
Performance of indices over 5yrs
Source: FE Analytics
Some of these companies may well prove to be the winners of the next decade, as Google was of the last, but pricing new-age opportunities for world domination is fraught with danger and the trend has historically proven to be transitory.
As growth stocks became more in vogue, so investors abandoned value areas such as pharmaceuticals, telecoms and utilities.
This effect was exacerbated by three rounds of ‘quantitative easing’ (QE) or money printing by the US Federal Reserve. As the US pumped cheap money into the financial system, investors were incentivised to direct it to areas that would generate the highest returns.
One example was emerging markets, which have experienced many years of above average returns as their populations urbanised and the demand for goods rose exponentially.
Cash on deposit, meanwhile, offered little or no return as interest rates remained at a record low. Once inflation was taken into account, cash even lost value.
However, as the US began to taper its massive money printing programme in 2013, investors started to retreat from these higher growth, often higher risk, areas. Developed markets benefited as a result.
Although the US recently posted a tiny first quarter GDP growth figure, many investors attributed this to the extreme weather of last winter and are already looking ahead to a bounce back.
As the global economy recovers, more companies are able to grow and invest in new projects and infrastructure. As a result, growth becomes more plentiful and growth stocks command less of a premium. At the same time, investors start to examine some of the value areas that have been left behind.
We have seen this switch happening in more dramatic fashion in recent weeks.
Performance of indices in 2014
Source: FE Analytics
Large cap and yield stocks have returned to favour. Other areas associated with growth such as UK small and mid-cap stocks have reached a valuation point where investors are starting to look again at large cap stocks for potential opportunities.
The return of value has also been manifest in recent M&A activity with Pfizer’s bid for AstraZeneca and General Electric’s bid for Alstom.
Further tapering, geopolitical unrest and market volatility could see relatively high yielding areas that have lagged find favour. The FTSE 100 index has increased only a small amount since December, but has been offering a yield of 4 per cent. This compares favourably with the Bank of England base rate of 0.5 per cent.
While inflation and bond yields remain so low and bonds so heavily owned, investors are bound to look elsewhere for returns.
Under-owned value shares with attractive yields, which may weather market trauma better than more sensitive growth stocks, could catch their eye.
FE Trustnet looked at funds to take advantage of a switch into large cap value in an article in May.
FE Alpha Manager John Chatfeild-Roberts (pictured top of page 1) is chief investment officer at Jupiter and manager of the highly successful Merlin fund of funds range.
Performance of manager and peers over 10yrs
Source: FE Analytics
Chatfeild-Roberts has vastly outperformed his peers over the last decade, with returns of over 135 per cent.
The manager holds a number of value-orientated portfolios in his £4.7bn Jupiter Merlin Income fund, including Artemis Income and Invesco Perpetual Income.
These comments were initially written in May 2014.
