Growth stocks have trounced their value counterparts in recent years as the low rate environment pushed investors into stocks with stronger future earnings.
And while growth stocks did sell off along with others during the broad market sell-off in March when the Covid-19 outbreak became a pandemic, the style has performed strongly in the rally.
As such, it has become harder to forecast when value stocks might start to see stronger performance.
Below, Trustnet talks to three fund managers to find out whether investors should begin adding value names to their portfolios or continue waiting.
“Beware growth traps” – Jacob Mitchell, Antipodes Partners
The strong outperformance of growth stocks and the ever-increasing market cap of just a handful of names in the US is leading to much narrower market breadth, according to Jacob Mitchell (pictured), chief investment officer at Antipodes Partners and manager of the offshore Antipodes Global Long fund.
“In its simplest form, market breadth is a measure of the percentage of stocks outperforming an index,” he said. “Market breadth in the S&P 500 has never been so narrow.”
As the above chart shows, market breadth (dark blue line) has fallen to historic lows more recently. Meanwhile, the global sector-neutral value factor (light blue line) has dipped into negative territory and market cap concentration (yellow line) has surged.
“Given the global pandemic that has been sending shock waves through economies in the past months, it’s astounding to see that this US-led market cap/performance concentration has surpassed the previous historical highs seen during the dotcom bubble,” said Mitchell (pictured). 
“We find it interesting that these market extremes have historically signalled a turning point – where the less popular, lower-multiple market losers begin to outperform the current winners.”
The Antipodes manager said investors need to ask themselves whether, after years of strong growth, now is the right time to be buying into secular growth and defensive parts of the market.
“Extreme market cap concentration, narrow breadth and historically low valuations of cyclicals are not unique to the US market,” he said. “It’s a pattern replicated broadly across the world and the phenomenon would suggest that there are potentially more growth traps in today’s market than there are value traps.
“What do we mean by a ‘growth trap’ – simply paying too much for a higher growth opportunity as investors did with great companies like Microsoft in 2000.”
While disruption is a long-term secular growth trend, Antipodes’ Mitchell said it is hard to argue that such stocks are “flying below the radar or are fundamentally misunderstood”.
“On the other hand, don’t just buy a cyclical because it’s on a low multiple,” he continued. “Within this broad group look for great businesses, attractively priced with embedded growth opportunities that the market is currently overlooking.”
However, he admitted that it will require some change for such stocks to begin outperforming again.
“Given the extreme level of multiple dispersion, tomorrow’s market leaders are most likely to be misunderstood lower multiple stocks,” he finished.
“Investors being pulled by growth momentum tractor beam” – Richard Staveley, Gresham House 
There has been a “very small blip of interest” in value stocks in the last month, said Richard Staveley (pictured), portfolio manager at Gresham House, but it has been “quite half-hearted”.
“Many investors are being pulled into the ‘tractor beam’ of growth stock momentum with a ‘Fear of Missing Out’, others choose not to sell despite valuation concerns,” he said.
“Turmoil has wreaked its usual havoc on investor psychology with ‘value’ sectors and stocks now typically associated with higher than average risk, which many investors are reducing due to the uncertainty that the virus brings.”
Huge sums of monetary stimulus have forced down bond yields thereby increasing the attractiveness of growth stocks, said Staveley.
“Stimulus reflects a likely constrained economic outlook where non-cyclical, organic growth companies should stand out,” he explained. “The issue is, for those that care about value, that there is seemingly for these investors no valuation ceiling or discipline for when the dynamic ends.”
Nevertheless, Staveley said that the constant re-rating of growth businesses cannot continue seeing little or no ‘margin of safety’ in current valuations.
“Even die-hard growth investors would need to acknowledge when yields have fallen from 4 per cent to 0.4 per cent, that can’t happen again,” he said.
“There are genuinely misunderstood value assets” – Tony Yarrow, Wise Funds
While some sectors are sometimes dismissed as value by investors, there are some companies with good prospects to be found within them, according to veteran investor Tony Yarrow (pictured), co-manager of the TB Wise Multi-Asset Income and TB Wise Multi-Asset Growth funds.
“In today’s stock market, value investments tend to be clustered in certain sectors,” he said. “These sectors are often viewed as cyclical, leveraged, over-regulated, and populated by individual companies that are financially weak or poorly managed.
“Looking at these sectors in more detail, it’s clear there are many companies to be best avoided. However, genuinely misunderstood value assets, which not only offer good long-term prospects but have performed robustly in the current crisis.”
One example is the mining sector – a capital intensive sector reliant on a healthy economic environment – that has been the scene of big de-ratings in the past.
“A mining boom that lasted from 2001 to the end of 2010 gave rise to the idea of a ‘commodity super-cycle’ expected to last into the mid-2020s,” said Yarrow. “Instead, it was followed by a savage recession, and miners’ share prices declined by around 75 per cent.”
However, it led to some of the largest mining companies becoming more shareholder-friendly, more discriminating about which assets they bought, leading to reduced debt levels and higher dividends.
“These well-financed, prudently managed, world-class businesses will benefit from an infrastructure boom, as the fiscal spending takes over from monetary policy to fuel economic growth,” he said. “They also remain cheap.”
Another out-of-favour value sector is financials, home to a number of high-quality companies but trading at cheap valuations “for no other apparent reason than investors see the sector as cyclical and have been avoiding it in anticipation of a downturn”.
“The sector fared badly during the global financial crisis because companies allowed finances to become overstretched,” he added. “Today’s financial companies run more conservative balance sheets, many with piles of cash and no debt.”
Finally, the retail sector is another value area where traditional bricks & mortar retailers have struggled in the face of disruption and increased competition from online businesses.
“At the end of last year, the online share of total UK retail spend was a little over 20 per cent,” the manager said. "It will be significantly higher now.
“Equilibrium will be reached at some stage. We do not know where that stage might be, though we doubt the final proportion will be online 100 per cent/physical 0 per cent. Again, we believe there are selective opportunities following the sell-off.”