Value could be ready for a long-awaited turnaround, according to Nick Kirrage, co-manager of the Schroder Recovery and Global Recovery funds. 
The investment style has had a resurgence in 2016 following a decade of underperformance, with the MSCI AC World Value beating the MSCI World Growth index by 7.27 percentage points.
However, over the last decade, growth has been a clear winner, beating the value index by 45.09 percentage points, as the below graph shows.
Performance of indices over 10yrs
Source: FE Analytics
Kirrage said: “Value investing has underperformed like a train for 10 years pretty much and as a result a huge amount of clients – I mean 90 per cent of clients – are tilting their portfolios towards more growth investments – quality, franchise-ability, whatever it might be – not value.
“So the first point I would make is that if that is the case and value has been underperforming for 10 years, if you are not considering rotating now into value you are never going to do it.
“It’s not that the 11th year always comes good; it’s that after 10 years with 90 per cent of your money one way you should be looking at this now. We all know you should buy low and sell high but bringing yourself to do this is hard.”
Value versus growth has underperformed by 3 per cent per annum for a decade, according to data from Schroders, and Kirrage admits this has been “extremely poor”.
However, the investment style has been coming back into favour in 2016, particularly in the UK, where value has performed particularly well over the last three months.
Performance of indices in 2016
Source: FE Analytics
Kirrage said: “People talk about the value rotation that is currently going on and how quality has underperformed and there are all kinds of ways that we post-rationalise what has gone on over the last six months.
“This is something people are suddenly more open-minded about because they’ve seen portfolios swing in a different way – everyone is open-minded when the thing they’re not invested in suddenly starts to perform.
“I would like to think that seeing what we’ve seen over 10 years and the way money is positioned, there is a better chance from here over the next decade [that value will outperform].
He says the style could be given by a tailwind because the market is mean reverting, meaning there will be more quarters where value outperforms. However, he notes that he is unable to predict the timing of this turnaround.
If value is to outperform, he says the following chart, which shows the performance of stocks valued from zero times earnings to more than 35 times earnings, will be the reason why.
“This chart is the most important chart that exists in investing anywhere in the world. It’s an equity chart but it exists in lots of other asset classes,” he said.
“I wish it was super exciting but it’s not. What this is doing is it takes the US stock market data back to 1871 so the longest financial market series that exists in the planet.
“You can recreate this with the UK stock market, the French stock market, etc it always looks the same. It shows the stock market returns you get if you invest at different valuation levels.”
Performance of indices in 2016
Source: Schroders
He says while this is the average and there are some such as Amazon.com which has gone on to become successful companies despite high valuations, for every positive example there are dozens of failures.
As a result, by investing in the lowest bucket, “we don’t have to be the best stock pickers in the world we just have to be brave for our clients”.
“Over this time period everything has changed, the macro, the politics, the demographics, the regulation but only one thing is the same and that’s the investors,” the manager said.
“We’re no more rational than we were in 1871 – we get really fearful when things get cheaper and really greedy when they get expensive.”
Kirrage’s £835m Recovery fund has been a top performer over one, five and 10 years in the IA UK All Companies sector, but admits it hasn’t been easy to maintain.
“It doesn’t happen every quarter. Sometimes you go one, two, three years where value gets creamed on three quarters out of four,” he said.
But when it works (and he says the fund has historically outperformed the market 53 per cent of the time), its outperformance can be “relentless”.
However, Richard Penny, manager of the five crown-rated L&G UK Special Situations Trust, disagrees that value and growth need to be separated.
Unlike a traditional value manager, he aims to buy small and mid-cap companies that are undervalued but that also have the potential for growth.
“The value versus growth debate is valid but to some extent I will try and find growth or pricing power at a good price and the only way to do that is to access them early so it’s a stock picking approach.”
He adds that the market over-responded to the Brexit vote in June giving value investors an opportunity to outperform, but admits that it has largely levelled out now, meaning there are few value opportunities in the market.
“I think subsequently we’ve had a good rebound and actually we don’t think there’s too much opportunity right here and now.”