The serial underperformance of the value style over the past decade shouldn’t put investors off, says Momentum Global Investment Management’s James Klempster, they should use it as an opportunity. 
Value stocks have been underperforming their growth counterparts for much of the past decade as the post-financial crisis environment of low rates and quantitative easing favouring the latter style.
But that doesn’t mean value should be written off just yet, said Klempster (pictured), who oversees the MI Momentum Focus fund range.
Klempster said: “Value has been a serial underperformer for the last decade and that tells you either that value is kind of finished as an investment style or it tells you that it’s a great opportunity.
“I think it’s a great opportunity. And I don’t see any reason why the reasons that cheap stuff outperforms over the long-run has gone.”
This debate over value and growth performance has been one of the most difficult allocation decisions for investors to make, according to Klempster, as it remains unknown whether or not the current valuation spread between the two styles will persist.
Performance of style indices over 10yrs
Source: FE Analytics
Value is “very cheap” at the moment, the Momentum manager said, and on some measures is even cheaper now than it was prior to the dotcom bubble of the early 2000s.
The rally in value stocks towards the end of last year showed that there is still some life left in the style and posed questions of how much longer the bull run in growth stocks can last.
“When it comes back [for good], I don’t know,” said Klempster. “Is it this year? We like to think that it could be, but it might still be longer yet.”
The multi-asset manager takes a blended investment approach, meaning that he invests stylistically in value, growth and quality combining all three styles together.
“We want a mixture of these styles in the portfolio because what we’re trying to do is create a core, kind of unfrightening centre to people’s portfolios,” he explained.
One of the other elements of having a blended approach to his investments is that the fund will be able to capture those early returns when a rally does come about, something which investors who hold no value could miss out on.
“When that reversal happens it’s very quick and if you don’t really have it in the portfolio then you’re missing out on the majority of the return,” he said. “But we don’t think that we’re clever enough to time those.”
As well as being more bullish on the long-term prospects for the value style, Klempster is also optimistic about the UK in 2020 where he has built an overweight in his MI Momentum Focus fund range.
“I think that the UK market is cheap still,” he explained. “Obviously some of that cheapness unwound at the end of last year.
“But if you look at our relative performance to the eurozone, and particularly to the US over the last 10-years, the last few years since 2016 have really weighed on our stock market and it looks pretty cheap to us.
Performance of indices over 10yrs
Source: FE Analytics
He added: “The US looks almost priced to perfection, there’s a lot of good news priced in there, and without sort of writing-off the States totally – we don’t want to be miles out underweight – we are underweight.”
More broadly, Klempster said that he was “cautiously optimistic” as the global economy moved out of what he called the “doom and gloom” of 2019.
“We expect to see continued good news for the global economy – in a modest sense – not in a gangbusters year, but a good year and one that leads further to a gradual increase in stocks,” he said.
But at the same time the manager pointed out that he wasn’t “overly bullish” sitting in a mid-point between optimistic and scepticism.
“I don’t think that we’ll see as good a year as last year, returns got a bit ahead of themselves need earnings to catch up a bit, he said. “But I’d expect to see a good year this year, a positive year.”
Each fund in the MI Momentum Focus range targets different volatility levels, but all follow the same investment process, fundamentally investing in undervalued markets rather than just investing in a theme.
The largest fund in the range is the MI Momentum Focus 5, a £25.6m fund that sits at the riskier end of the range with a volatility objective of 8-11 per cent and a return target of 5 per cent above the consumer price index rate of inflation.
Performance of fund versus sector & benchmark over 5yrs
Source: FE Analytics
Over the past five years it has made a total return of 27.02 per cent, underperforming the average peer in the IA Flexible Investment sector (36.56 per cent) and the UK CPI+5% benchmark (38.84 per cent). It has an ongoing charges figure (OCF) of 1.42 per cent.