Anyone struggling to understand why growth investing’s supremacy over its value counterpart cannot last forever should look at the hype surrounding the launch of Greggs’ vegan sausage roll, according to Rowan Dartington’s Donald Maxwell-Scott.
Data from FE Analytics shows the MSCI AC World Growth index has made 283.75 per cent over the past decade compared with 194.08 per cent from MSCI AC World Value; however, value investing tends to significantly outperform over the extreme long term and many analysts believe it is just a matter of time before there is a mean reversion.
Performance of indices over 10yrs
Source: FE Analytics
Maxwell-Scott (pictured), a technical investment manager at Rowan Dartington, is one of these. He said a deteriorating economic outlook could mark the start of a return to value investing
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“Bond yields have fallen with the one exception of Italian bonds. The change in interest rate policy by the US has caused yields to come in across all fixed interest classes,” the manager explained.
“Greece is trading at 2.8 per cent, down from 3.6 per cent and now only marginally ahead of Italy. Mounting debt and fractured politics are causing concern. Falling yields suggest the global economic outlook is deteriorating, and with talk of the US Federal Reserve cutting rates, and mutterings about a potential need for more quantitative easing (QE), it all points towards a difficult economic period approaching.”
QE is normally positive for growth investing, but with such measures having already been in place for a prolonged period, Maxwell-Scott pointed out further loosening would simply represent a tampering with the status quo.
The manager added that if he is correct about an economic downturn, then there is an argument for value investing – a strategy where stocks appear to trade for less than their intrinsic value, with the investor believing markets are inefficient rather than all the information being priced in.
He pointed to Greggs the baker to illustrate why.
“At the start of the year, Greggs was trading at £12.66 per share, but now the current market price is £22.60,” said Maxwell-Scott.
“This represents an increase of 77 per cent in its share price. If you multiply the difference between the two share prices (£9.94) by the number of shares Greggs has in issue, then they have added £1,005,530,400 – over £1bn of value.”
Performance of stock year-to-date
Source: FE Analytics
Equity analyst notes on Greggs suggest this is down to the vegan sausage roll the baker introduced in January, which is why Maxwell-Scott highlighted the difference in share price between the start of the year and today.
However, given that Greggs sells its sausage rolls for £1 each, this would mean it would had to have sold one billion of these to justify the increase in the share price.
“Assuming a UK population of 66 million, then it would mean each of us scoffing just over 15 vegan sausage rolls each,” the manager continued. “This doesn’t even assume the costs of producing and selling the vegan sausage roll.
“Of course, the above is a rather crude way of looking at it and there are other variables. But we believe it does illustrate that markets are not always as efficient as people think and that value is still out there.
“Indeed, Greggs could very well still be undervalued, even given the remarkable increase in its share price. There is certainly a danger that too many fund managers are on a one-way momentum growth train.”
The manager said that while investments in growth stocks such as the major tech names are all the rage at the moment, a return to fundamentals would likely take place if we were to enter a period of economic decline – which would inevitability lead to a correction in this area of the market.
He added recent falls in companies such as Facebook indicate that we may have already reached this point.
Value stocks, on the other hand, are often better protected in the event of turbulent markets, as they don’t sit on lofty valuations, so there is limited downside.
“What we might find is that after 10 years of growth being the more rewarding strategy, which is understandable given the high levels of QE, investor disappointment when expectations don’t meet valuations is severely punished,” Maxwell-Scott continued.
“However, while we believe a shift is underway, it might be some time before it materialises. We believe that certainty over Brexit will help the move to value investing – the stocks that have been out of favour. The hope is that we will get some clarity on Brexit when the next Tory leader is announced.”
Not everyone is convinced that value investing will overtake growth, however. In a recent article on FE Trustnet, James Anderson, manager of the Scottish Mortgage Investment Trust, said the investment world changed the day Microsoft listed as its performance since then has contradicted Benjamin Graham’s criticism of growth stocks.
Meanwhile, Anderson’s colleague at Baillie Gifford, Kirsty Gibson, said that we are currently seeing a convergence of multiple forces that will lead to a prolonged period of disruption, which value investing is failing to account for.