Both value and growth styles of investing – or, indeed, any style – are highly limiting to an investor’s opportunities and returns, according to Mikhail Zverev, head of global equities at Aviva Investors.
The debate between growth and value investing has taken on renewed intensity in the opening months of 2021 with a rotation into value after years of growth outperformance.
MSCI ACWI Value vs MSCI ACWI Growth YTD
Source: FE Analytics
But according to Zverev: “Our view is that style-driven investing is like an intellectual shortcut. This is not a judgement, this is more of a kind of a dispassionate view on the subject.”
He explained that the global market is inefficient and will always misprice stocks in some way, creating investment opportunities. Growth and value, or any type of investing by factor, is essentially focusing on just one of these inefficiencies.
“They all have their intellectual justification, and that's fine. But at the end of the day by just focusing on just one corner of the market and efficiency spectrum, you're doing two things. Three if I’m being polemic,” he said.
“One, you limit your clients opportunity set by just focusing on one inefficiency.
“Two, you link your clients’ performance experience to the performance of that factor. You can be a great stock picker but if you hitch your wagon to value factor your clients’ performance experience will be very much driven by value factor performance first, and then your performance versus the value factor second.
“So you limit the opportunity set, and you introduce a factor of volatility into your performance and your client’s performance experience.
“The third thing you're doing, you save yourself some hassle as a fund manager. And that's great for fund manager or a management firm but it's not so good for a client. It's easier to screen the universe down to 100 stocks which are the only stocks worth having and ignore the rest of the wealth of the opportunities global equities present. That's not necessarily in clients’ best interests.”
Style investing has been becoming more popular in recent years as growth has dominated markets for so long. This has created a growing habit of ‘herding’, according to Zverev, where large amount of inflows converge and move between styles. These shifts increase market volatility.
‘Herding’ has been building for several years and mainly plays out in reaction to significant market events, such the 2016 EU referendum and Donald Trump’s election.
The high volatility and rotation seen in markets at these times were in some ways more pronounced than during the European or even global financial crisis, Zverev said.
“To somebody landed from Mars looking at this just doesn't make sense. Why would that be the case?” he asked. “Well, because so much more money is herded together in one area, be it cyclicals versus defensive, US versus Europe, or value versus growth.”
This has been especially pronounced in the opening months of 2021.
“Year to date sector rotations were as pronounced – from the data that we’ve seen anyway - as they were during 2020 when we actually had a global pandemic breaking out,” Zverev said.
“Today, it's almost like the market is become a dichotomy between structural growth story of Covid winners and the reopening trade.”
This is where being style agnostic is more impactful, a strategy Zverev takes on his Aviva Global Equity Unconstrained fund.
He said: “Those herds do not care about individual stocks specifically, or the idiosyncrasies of [a] particular business.
“If you're a fundamental stock picker with a mandate to make this highly quality specific judgments in a style agnostic universe the opportunity set we're facing is bigger. It's our job to deliver for it. But as an investor and as somebody who has most of my savings in my fund, I'm very enthusiastic about that.”
In his own Aviva Global Equity Unconstrained fund, Zverev conscientiously takes an opposing view on stylistic investing.
“We want to give clients access to the whole opportunity to sell because inefficiencies occur everywhere. And in fact, they occur in different places at different times to different degree,” he said.
“Two, we do not want to limit our clients experience, or their performance experience to one benefactor.
“And three, we’re willing to invest time commitment, shoe leather, money and resources into capturing broader opportunity sets.
“And that allows us what might sound like a slightly intellectually arrogant approach, but I don't think it is.”
Applying his unconstrained view, Zverev said an area his was focusing on was domestic tourism in emerging markets as part of the reopening trade.
The UK recently saw the end of its third lockdown and reopening of non-essential businesses, but international travel remains limited. Travel and leisure business, such as airlines, in developed markets have been pricing in a strong recovery as the “propensity to travel” hasn’t changed.
But emerging markets offer a better investment case for this, Zverev said, especially China and its domestic tourism trade.
“China's been open for a very long time. The borders are closed but the domestic market is open and we find an interesting dichotomy where reopening trades,” he added.
The emergence of a growing middle-class in China has meant more people are looking to travel, not just internationally but domestically as well. Zverev said he’s invested in domestic travel agents focused on lower tier cities in this theme.
“It's not just about the recovery back to the pre-Covid travel level, it’s [that] the travel activity continues to grow structurally and online travel agents of integration continues to grow structurally,” the manager explained.
“I think that that illustrates that even in such a headline, kind of well publicised thing [such] as reopening trade there are new answers in some emerging markets that make it much more compelling to develop market trades.”
Zverev has run the £131.2m Aviva Global Equity Unconstrained fund since launch in 2019. During that time, it’s made a total return of 23.10 per cent, outperforming both its IA Global peer group and the MSCI ACWI index.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The fund has an ongoing charges figure (OCF) of 0.63 per cent.