Momentum investing has been a powerful strategy in recent years, although the events of the past month have suggested to some that this style might be starting to wane. 
Over the past decade, the momentum style – or buying assets that have already risen in the hope that existing market trends will continue – appears to have worked. This is largely down to the fact that quality-growth investing has significantly outperformed value in the years since the financial crisis.
FE Analytics shows that the MSCI AC World Value index has made a 151.47 per cent total return over the past 10 years, compared with a 325.03 per cent gain the MSCI AC World Momentum. The growth and quality indices are also ahead of value by a clear margin.
Performance of indices over 10yrs
Source: FE Analytics
All of this means that investors who have implemented a bias to value in their portfolios have had a tough ride for much of the recent past.
However, the uncertain markets of September saw momentum investing splutter and some investors suggest this could herald the return of the value style – although it is too soon to tell whether a new trend has started already.
Erik Knutzen, chief investment officer – multi-asset class at Neuberger Berman, said: “As evidence of what is being called the ‘momentum massacre’, look no further than the sudden underperformance of growth stocks versus value stocks since the start of the month.
“It has been as severe as we have seen for a decade.”
These rotations, he noted, often have a simple explanation. When investors fear a broad slowdown in the economy, they are willing to pay more for the steady income streams of defensive growth stocks as they expect the slowing economy to push down bond yields.
If this trend is consistently reversed, it suggests that investors now expect more positive conditions – such as higher growth, higher inflation and a reduction in geopolitical risk.
But Knutzen added: “While economic and geopolitical news may have become modestly more positive lately, we are cautious as to whether this justifies the startling market reversals. New US-China trade talks have been scheduled, additional tariffs have been postponed and Brexit is potentially delayed again, yet the major issues around these risks remain unresolved.
“We will need to see more to sustain the market’s new trends. Two weeks do not make a recovery, and the likelihood of recession is still higher now than it was three or six months ago. However, traders appear to have recognised the prospect of a soft landing is not as remote as they were pricing for in the pessimistic, illiquid summer markets.”
Performance of indices in September 2019
Source: FE Analytics
Tony Yarrow, co-portfolio manager of the £105.3m TB Wise Multi-Asset Income fund, is optimistic about the value opportunities in the market – and is especially excited by the “priced-to-go-bankrupt valuations” on offer when it comes to UK equities.
“Despite the gloom, prospects for the UK consumer are surprisingly positive. Not only are more people in work, but they have more money to spend. It would not surprise us if we saw a kind of feeding frenzy in depressed UK assets,” he said.
“We have invested an unusually high proportion of our TB Wise Multi-Asset Income fund in the UK because of the growing disconnect between our estimates of the values of these assets and the prevailing market valuations.”
Of course, pessimism towards the UK remains high as political uncertainty and Brexit loom large over the market. The Bank of America Merrill Lynch Global Fund Manager Survey showed that UK equities remain the consensus underweight for asset allocators around the world.
However, Yarrow argued that investors who are thinking of selling down the UK further in case this situation gets worse need to consider just how much bad news has already been priced in the UK stock market.
The announcement that Hong Kong property company Cheung Kong has agreed a takeover of the brewer and pub owner Greene King at a premium of 50 per cent offers a hint of the opportunities that the manager sees in the UK.
“This transaction confirms rational investors are prepared to pay vastly above current market values for the long-term returns on offer,” he explained. “It is also worth noting Cheung Kong has not bothered to wait for clarity on the outcome of Brexit.”
Andrew Beck, portfolio manager of the Nordea 1 – North American Small Cap fund, sees plenty of value opportunities in the market, especially within the industrials, communication services and technology sectors.
He conceded that the value vs growth debate has been well-trod but added that many market participants appear to underappreciate just how long value’s underperformance has been going on for.
In the US, growth has outpaced value since 2006 – which Beck said is the longest period on record. The second longest period, he noted was only half this span – between 1993 and 2000.
“The key driver of growth stock outperformance has been the weak economic growth witnessed during the current expansion – which is also at record length,” the manager said.
“As long as growth remains scarce, it is unlikely the value style can regain the ascendency. However, there is only so long investors can continue to ignore today’s valuation gap – with growth stocks trading at multiples significantly wider than value counterparts.
“While valuations are still below historical extremes, such as during the TMT [technology, media & telecommunications] bubble, we are highly unlikely to be still talking about a growth dominance in the coming years.”