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Fidelity’s Podger: Why the value trade hasn’t gone for good

FE Alpha Manager Jeremy Podger, who runs the four crown-rated Fidelity Global Special Situations fund, explains why the value approach to investing remains attractive despite a recent pullback in the growth/value trade.

Lauren Mason

By Lauren Mason, Senior reporter, FE Tru...
Friday July 14, 2017

Investing in value stocks remains a strong way to generate alpha, according to Fidelity International’s Jeremy Podger, who said interest rates and bond yields across the globe could start to rise soon.

The FE Alpha Manager , who heads up the four crown-rated Fidelity Global Special Situations fund, said this years’ snap-back from 2016’s growth/value rotation by no means spells the end for value investing.

Performance of indices in 2017

 

Source: FE Analytics

It should be noted that, when structuring his portfolio, Podger (pictured) maintains a bottom-up, flexible approach to investing and chooses stocks which fall under three categories: ‘corporate change’, ‘exceptional value’, and ‘unique businesses’.

“We’ve seen a long persistent value bear market over recent years,” he said. “Under this definition of ‘value versus growth’, that [movement] reflects what we have seen in bond markets with progressively falling bond yields over this period, a certain amount of political uncertainty and convergence towards relatively safe growth names.”

During the second half of 2016, he pointed out that bond yields started rising due to inflation expectations and the increased potential for interest rate hikes. This subsequently sparked an aggressive market rotation from growth into cyclical value plays.

However, as investors became less certain that fiscal policy from the likes of US president Donald Trump would be implemented, many have retreated back into high-quality growth names as they deem the current economic and geopolitical backdrop to be uncertain.

“Value has given back all of its performance and you can see that has happened region by region,” Podger explained.

“I would say, though, that this has been quite substantially sector-driven. If you look within the sectors at value stocks versus growth within the sectors, the value rally that we saw last year has not completely reversed in the way investors might think.

“I personally remain relatively optimistic and think that the value approach is very much legitimate at this point, particularly because we’ve come so far and depending on your view on interest rates and bond yields, I think there may be a slightly asymmetric risk from here over the next five to 10 years.”

The manager pointed out that inflation has most notably creeped up in the UK in 2017. While expectations have been dampened by weaker oil prices recently, Podger said there has nevertheless been an inflationary uptick both domestically and globally.

 “The other thing to highlight in terms of that growth and inflationary backdrop is that, around the world, labour markets are looking tighter than they have done for many years,” he continued. “This is particularly true in the US where unemployment is at a very low level; this is a level where we normally see some impact in terms of wage growth.

“The cautionary note however is that we’ve been through a period of strong data surprises. Around the time of the US election, there was a pick-up in sentiment. In the US specifically, I think that was generated by the promise of certain policy measures – particularly tax cuts and infrastructure spending.


“Obviously we have seen very little follow-through of that so far and that is why you have seen the [inflation expectations] fall quite substantially. However, I would say that looking around the world at general manufacturing indicators, these remain relatively robust.”

Another contributing factor to last years’ growth/value trade, according to Podger, was the well-received stimulative measures implemented in China. As these have been “reined in”, however, he said inflation expectations have dwindled.

“While right now I think the economic backdrop appears to be pretty benign, we do have to contend with investors’ potential reactions to going from these potential positive policy factors to perhaps more of a policy vacuum,” the manager explained.

“Looking now from this relatively benign picture, it will be about trying to understand the impact of normalisation of interest rates as the Fed raises rates and, potentially, what will happen if the ECB becomes slightly tighter in its monetary policy in Europe. That’s where I think we are.”

When positioning his portfolio, Podger’s three investment ‘buckets’ vary in weightings throughout the course of the economic cycle in a bid to outperform across different market environments.

Across all three of these categories, however, the manager’s primary focus is on valuation as he believes attractive pricing limits any potential losses while maximising the opportunity for gains.

While his positions are chosen on a stock-by-stock basis, he is particularly positive on European and Japanese equities at the moment.

“In terms of the earnings picture for Europe, the consensus expectations for each year’s earnings have sloped downwards as we’ve gone through time towards the final confirmation of what the earnings were for that year,” Podger explained.

“Furthermore, up until the end of 2016, those earnings ended up in the same place - there was no earnings growth. But now, for 2017 and 2018, you can see a step up in earnings for the European region.

“We also haven’t seen the normal seasonal pattern of analysts downgrading progressively through the year. Not only are earnings growth expectations robust for Europe, they’re also pretty stable.”

When it comes to Japan, he pointed out that its earnings expectations have a higher degree of volatility because they are sensitive to movements in the yen.

Performance of currency vs sterling

 

Source: FE Analytics

While the manager is neutral on the currency, he believes the country is yielding plenty of opportunities to find attractive stocks.


“The most important factor is how far dividends have come,” Podger said.  “There is definitely a wave of shareholder-friendly reforms coming through the Japanese market. It’s still very much in progress.

“Dividends are being raised pretty aggressively and we’re seeing share buybacks. I think this is a much more constructive background for the Japanese market, which also remains very attractively valued compared to other regions.”

When it comes to opportunities within the home market, however, the manager is less positive.

“My main concern at this stage is, despite the UK’s substantial and consistent underperformance against the rest of the world and more recently against Europe, one might be tempted into thinking sterling is now at very competitive levels, which should be a very significant boost to potential future growth and make UK investment more attractive in a global context,” he explained.

“At this stage, I am very cautiously positioned within the UK in the fund. Not only are we now seeing signs of significant slowdown in foreign direct investment – which we do need to sustain the still-significant current account deficit that we have – but we are also maybe storing up further problems in terms of domestic consumption.

“The UK savings ratio has plummeted. What that is telling us is that consumers so far have responded to this squeeze we have seen in wages as inflation has risen by reducing savings and clearly that is not a sustainable position in the medium and longer term.”

 

Since Podger took to the helm of Fidelity Global Special Situations in 2012, it has outperformed its sector average and benchmark by 52.01 and 36.86 percentage points respectively with a total return of 132.47 per cent.

Performance of fund vs sector and benchmark under Podger

 

Source: FE Analytics

It has a clean ongoing charges figure of 0.95 per cent.


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Data provided by FE. Care has been taken to ensure that the information is correct, but FE neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.

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