Many of today’s younger fund managers – for example those who started their careers in 2007 or later – have only known an environment in which growth equities have outperformed value equities. 
Indeed, many industry discussions at conferences we attend discuss the view that growth is the only forward, particularly in the United States, with many analysts in particular unable to fathom why anyone would adopt a value bias, in any circumstance.
However, this has been borne out by recent results. Since 30 September 2007, the MSCI World Growth index has returned 156.4 per cent, whilst the MSCI World Value index has returned 104.0 per cent. This difference is even more pronounced in the United States, with US growth outperforming US value by 80 per cent over the past decade.
Ten years of loose monetary policy has consistently supported long duration growth assets – large-cap consumer staples and healthcare companies for example – whilst the well-known FANG style stocks (Facebook, Amazon, Netflix and Google) have also prospered.
AUM invested in value and growth/core stocks
Source: Canada Life Investments
As a result, growth as a style dominates US and global equity portfolios. Looking at funds included in the IA North America and IA Global sectors, you can see in the chart above that just 28 per cent of assets in these sectors are invested in value stocks.
What does history tell us?
What many investors do not realise, is that over the long-term, value stocks have significantly outperformed growth stocks.
It has only been during periods of sharply falling interest rates – such as the last decade for instance – that growth has been the winner. This can be shown by the relative performance of the MSCI growth and value indices since their inception in 1975, as well as since 1927 using data from the Nobel Prize winning economists Eugene Fama and Kenneth French.
In addition, the data shows that in decades where 10 year US treasury yields were rising, stable, or only slightly falling, value outperformed growth.
The global underweight to value, combined with growth’s decade-long dominance, provides us with an opportunity to gain exposure to undervalued businesses, an approach that has been proven to outperform over the long-term. This outperformance has been even stronger in environments when rates are rising.
Globally, economic growth continues to be strong and central banks are beginning to normalise monetary policy, led by the US, where interest rates now stand at 1.25 per cent. Last month, Bank of England governor Mark Carney suggested that rates will rise shortly, which contributed to a rise in yields across developed markets. We believe this environment of modestly rising yields will continue, and will be supportive of value investing.
Source: Canada Life Investments
We prefer a flexible, macro-focused approach to global equity market investing with neither a constant growth nor value style, although we do typically maintain some form of value or growth-at-a-reasonable-price (GARP) bias.
Macro factors play a very important role in our sector allocation and stock selection process. Our favoured indicators include the Citigroup Economic Surprise Index (CESI) and various Purchasing Managers’ Indices (PMIs). We believe the CESI helps us to forecast as to whether any particular economy will surprise on the upside or the downside in the coming months, whilst the PMIs highlights recent expansion or contraction. Therefore, by being able to position our funds with a growth or value bias ahead of the market, we believe we can capture significant upside. This
This investment approach means we often adopt a contrarian position in the face of market consensus. Given the dominance of growth investing over the last decade, we have therefore more often than not been biased towards value during the last 10 years.
Most recently, for example, we adopted a significant value slant in July as the CESI suggested that consensus views were becoming bearish, bond yields began creeping up on no news and we had not seen the level of underperformance we expected from the financials sector. This positioning has taken a few months to come to fruition, but value has started to outperform more recently.
We would also point to a value bias working very well in the second half of 2016. We were correctly positioned for this move, with big overweights in sectors such as financials, industrials and materials. This proved to be a significant boost to performance. Prior to 2016, the last time value outperformed growth in the US was remarkably in 2008.
Mike Willans is head of international equities at Canada Life Investments. The views expressed above are his own and should not be taken as investment advice.