Value has made a small comeback recently against growth after being out-of-favour for the last decade, but BlackRock’s Dan Whitestone doesn’t believe it’s a substantial rally.
During his career, and latterly as manager of the growth-focused £410m BSF UK Emerging Companies Absolute Return fund, Whitestone said he has seen “mini reversals and style changes” quite regularly.
“But I don’t see what has changed in the current regime and – this is just my view – of a low interest rate and low inflation world,” he said. “I’ve never subscribed in the past few years to this inflation bogeyman story because I can give you 150 examples of pervasive price deflation, you just pick an industry.”
With little prospect of inflation coming through to make central banks comfortable in raising rates from ultra-low levels, the growth style is likely to push on.
“I think that [this] favours equity markets and it particularly favours quality-growth companies that can generate top-line growth and expand their markets, and generate cash flow and pay dividends,” said Whitestone. “I don’t see a sustained value run from here.”
Performance of growth vs value indices over 10yrs
Source: FE Analytics
Whitestone whose offshore fund launched late last year and is run along the same process as the highly rated BlackRock Throgmorton Trust and Whitestone’s Cayman Islands BlackRock UK Emerging Companies hedge fund, focusing on the quality- growth companies that are disruptors or leaders in their sectors.
Launching in October 2018, however, wasn’t the greatest time to launch, he admitted. Yet, the fund managed to navigate the difficult end to 2018 and emerge relatively unscathed.
“We lost a couple of per cent in Q4; which we thought with all of the equity market falling was a good result,” he explained.
Since launch, the fund has managed to maintain a top quartile position something that Whitestone believes is thanks to the process and philosophy of the fund.
“The process matters but it only matters if you understand our philosophy,” he explained. “We are only interested in owning companies which we think are genuinely differentiated or comes at a leading industry change.”
One such company is Microsoft – the fund’s largest holding at 2.92 per cent – and part of the 30 per cent that the fund is allowed to invest in beyond UK equities. Established in 1975, it has been a world leader in computer technology for decades and it’s arguable that this is not an upcoming ‘disruptor’ in the market, he said.
Performance of Microsoft share price
Source: Google Finance
However, Whitestone said Microsoft is an emerging disruptor when it comes to cloud technology.
“Digital transformation is one of the most exciting structural growth stories in the stock market,” Whitestone said. “There is a fundamental need, imperative to corporates to invest in their digital journey.
“Microsoft is just one of the many companies which is driving this digital transformation industry which has grown $1.3trn over the past three years and 20 per cent year-on-year.
“And it’s not slowing down for Brexit, it’s not slowing down for a trade war. Corporates have to do this or they’ll get left behind.”
He added: “This is a great example of the trends that the team and I look for. And then [we have] to find companies that are either leading that change or benefitting from it.
“Some people might think that Microsoft is a big company, which it is, but we think that it can become a much bigger company.”
Another example in the consumer retail sector – and a bit closer to home – is JD Sports.
While not the biggest fan of the embattled UK retail space, Whitestone said the Manchester-based sports retailer JD Sports had managed to break through the “oppressive” high street industry to deliver strong financial results and was one of the biggest contributors to the fund’s performance during its first year.
“JD Sports has built its growth over several years: this is not a one-year flash in the pan,” Whitestone said, having made compound returns through strong cash flows and by expanding operating margins through acquisitions such as US sports retailer Finish Line.
Performance of JD Sports over 5yrs
Source: FE Analytics
“If you just focus on JD Sports UK [its UK business] they’re still growing their sales in high single digits,” he said. “Find me a retailer who is seeing height digit like for like sales. It’s very rare.
“Clearly they’re also riding a secular trend of athleisure which everyone keeps thinking is just some short-term cyclical phenomenon; which has been going on now for about eight years.”
The BlackRock manager added: “I like JD Sport because it’s a great example of a company that, even in a very difficult industry, if you get the other elements right – management team, product offering, strength of the balance sheet, cash flow – because of the strong strategy and strong offering and putting the consumer at the heart and the brands then they’ve delivered phenomenal success over the years.
“JD Sports hasn’t gone up over 100 per cent this year because growth’s outperformed value, which is what someone would try to lead you to believe. It’s gone up three massive upgrades to its sales and to its profits.”
Looking at BSF UK Emerging Companies Absolute Return, Whitestone said that while it is important to make money, investors have to make sure that it’s being made “for the right reasons”.
“I need to know that I’m delivering performance for the right reasons and there’s no better right reason than the companies you own coming out and beating their forecasts and upgrading their guidance,” he explained. “Not because of one style or one event, it’s about the stock-specifics and investing in outperformance.
“And that’s been true for every year that I’ve managed funds and that’s the driver of [my] funds.”
Performnce of fund vs sector & benchmark since launch
Source: FE Analytics
The BSF UK Emerging Companies Absolute Return fund has made a total return of 9.12 per cent since its launch last year. The fund has an ongoing charges figure (OCF) of 1.41 per cent.