Growth has never outperformed as much nor been so expensive relative to value stocks since records began, according to Janus Henderson Investors’ Nick Sheridan (pictured), but that doesn’t mean they have been producing the best earnings. 
If history is anything to judge the future on, then the current outperformance of growth stocks compared to value stocks is going to continue, said the manager of the Janus Henderson Horizon Euroland fund.
Whilst this can be a good thing, according to Sheridan, the problem now that it is impossible to predict or know when the inevitable inversion will come about, and value will return to favour. Although that would be a positive for him.
Performance of style indices over 10yrs
Source: FE Analytics
“Clearly it could get more stretched,” he said: “There is an old saying in markets, that you can be right but you might be out of a job or retired before the market proves it, as these things can go on for an awfully long time.”
The gap between growth and value over the past decade has largely been driven by the ultra-loose monetary policy of the post-financial crisis era and the quantitative easing (QE) that continues today.
Other factors have been, the continued expansion of tech-dominant companies along with the increase in passive investment’s popularity.
Whilst Sheridan said he did not dispute the continued outperformance of growth against value, despite being a value investor, he had seen an unusual pattern occur.
“What might happen and might change it is that what has been happening over the last couple of years, and particularly since 2017, is that growth has been outperforming value,” he explained. “But the slightly unusual thing here is that, actually, value earnings have been outperforming growth earnings.
“So, value stocks have been growing their earnings better than growth stocks, but they’ve just been getting cheaper because people like this idea that there’s new technology everywhere and they want to go and buy the stuff that’s going up.
“This happened in 1999 and it didn’t happen for as long as this I have to say.”
The consequence of this is that the UK and Europe as a whole have become far more attractive to investors. Sheridan added, and that the wave of investor migration back to Europe could well be the first shift in the changing tide in the value-growth relationship.
“What we can see is that people don’t like Europe,” he said. “The US doesn’t. International investors don’t like Europe because of the politics and the environment. So they’ve been busy selling Europe.
“And it may well be that they’ve been continuing to hold growth stocks and selling value stocks, I’m not 100 per cent certain, but what this seems to show is that, actually given the economic surprises that are coming out of the region actually things aren’t quite as bad as people would perceive.
Source: Investment Association
He added: “So it may be that you start to see international investors come back and that may be one of the ways in which value-growth will change.”
For a “value biased” investor, Sheridan said he has been feeling the wind in his face with the dominance of growth investing but not enough he said to make him change his process or the fund’s policy.
The Janus Henderson Horizon Euroland manager said it is more important to stick to what you believe in and commit to the market changes you think will happen.
“Value is way in the future at the moment,” the European equity manager said. “We’re slightly behind the index, but we’re not doing too bad a job given what we’re finding in the sense of headwinds.
“It’s not pleasant, it’s not something that we’re particularly enjoying but we are not changing the process because we know that over the longer term this does work and we are firmly of the opinion that what you’re seeing at the moment in markets is transitory and will not be here for the longer term.”
He added “We can see that growth is absolutely smashing it. People are buying expensive stocks where the return profile is maybe five to 10-years in the future rather than cheap stocks where the return profile is maybe 12-18 months out.
“They are doing that because they are willing to take on board all these risks because their attitude is that same attitude of the last five to 10-year and that’s the same environment that will be in place going forward. We don’t believe that’s true.
“You can see there that the last time value traded as cheaply as this relative to growth was back in 2000. It’s very, very difficult at the moment to be anybody who has the slightest bit of value in your fund.”
Remaining in his value investment lane Sheridan said that the fund looks for four keys elements in the stocks they consider: earnings, value of growth, dividends and net asset value.
He said: “We’re looking for companies that are incorrectly priced relative to their return profile,” said the manager, who particularly looks for “quality value” companies that are cash generative and have the ability to reinvest it back into to the market so it can grow quicker.
While his €1.3bn Janus Henderson Horizon Euroland fund has struggled to outperform the index over the past three years – making a total return of 31.39 per cent against a 39.72 per cent gain for the MSCI EMU benchmark – it has strong long-term track record.
Performance of fund vs sector & benchmark under Sheridan
Source: FE Analytics
Under Sheridan, who has overseen the offshore fund since November 2011, it has made a total return of 153.85 per cent compared with a 114.81 per cent gain for the benchmark.
The fund has on ongoing charge (OCF) of 1.88