Taking large bets on the growth style has become an increasingly common habit among investors during the post-crisis bull run exposing them to significant risks, according to Schroders’ Nick Kirrage.
Kirrage, who co-heads the asset manager’s global value team, said he has seen an “weird” extreme concentration of growth stocks in clients’ portfolios, arguing for greater diversification. 
“I don’t know a single client who’d bet the entire farm on a single approach, single market or single asset class,” he said.
“But when it comes to style the entire world is investing one particular way. Research shows just 10 per cent of all the global equity fund managers are value-focused. We think that is a huge risk.”
The recovery since the financial crisis of 2007 has been characterised by the outperformance of growth or momentum trades.
Despite a brief period when the trend was reversed in 2016, value stocks have lagged behind quality growth peers over the last decade.
Performance of indices over 10yrs
Source: FE Analytics
For Kirrage, having extremely concentrated style-based portfolios is not only unusual but not the best option due to the uncertainty about the future direction of markets.
He said: “No one has a crystal ball so, no matter how convinced you are, you don’t put all your eggs in one basket, you tilt it one way or another, by region, by asset class, by size of company. It doesn’t matter, you always spread it about.
“However, in this instance, everybody is happy to put all their eggs in one basket and that basket is called growth, quality or franchise investing, but is all growth by another name.
“To me this is amazing and maybe it will be fine, but it isn’t that there aren’t warning signs out there.”
Looking back to 2016, when value rallied for a few months resulting in the outperformance of the style for the first time in 10 years, Kirrage said that year 84 per cent of global equity fund managers underperformed simultaneously, which he believes didn’t happen by chance and may happen again if the same mistakes are made.
“How does that happen?” he asked. “Because they are all buying exactly the same kind of company,” the manager pointed out.”
Acknowledging the potential accusation of bias as a value investor, Kirrage noted that both the Schroder Global Equity Income and Schroder ISF Global Recovery funds he co-manages have outperformed the benchmark. He also alluded to the cycle the economy follows as a sign the growth rally may be coming to an end.
“We all know the theory of this investment is you buy low you sell high,” he explaned. “We also know that most things have a cycle: interest rates are low then they are high, GDP is high then is low: things go round in circles.
“My question would be: with value having had the worst period in history and 90 per cent investors having a bias towards growth style, if you are not considering a value fund today, when are you going to do it?
“Value has been underperforming and it sucked because we are value managers and a screen generates all our ideas, but here is the deal: no one puts a gun to our head and says buy the stocks, and the screen doesn’t pick the portfolio,” the manager explained.
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
Since launch in 2013, Schroder ISF Global Recovery – which Kirrage co-manages alongside Kevin Murphy ad Andrew Lyddon – has delivered a 62.71 per cent total return compared with a gain of 62.71 per cent for the average fund in the FO Equity sector and an 86.46 per cent return for the MSCI World benchmark.
The reason the team believes value works, Kirrage highlighted, can be summarised in one simple factor, that ‘everything changes in finance except the people’.
“Humans don’t change. In the short term we learn a lot, in the medium term we learn a bit, in the long term we learn nothing,” the Schroders manager said. “What value investing does is exploits human emotion, that is why is so enduring.
“I have no idea what Donald Trump is going to do and I have no idea of what is going to happen to Chinese GDP or interest rates, but I would bet my house that humans are going to be humans over the next ten years, that’s where we put our money.”
Commenting on the Schroders Global Equity Income, co-manager Simon Adler said the team avoids value traps.
He said: “It’s a philosophy. The cheapest 20 per cent of all global equity stocks is 2,500 and we bought 45. I guarantee you in 2,500 companies there are 45 that are going to beat the index.
“We hate value traps and that is why we reject 2,455 of the cheapest 2,500.”
Adler added many investors tend to get the philosophy wrong and are unable to ignore their personal preferences when analysing a company.
He said: “If I ask you if you want to invest in Tesco, your brain swaps the question for: Do you like Tesco?
“Nick [Kirrage] and I do not like Tesco but that is not what we are paid to do.
“We are paid to make a judgement and the only way you can make the investment judgement as opposed to an emotional judgement is to distil it into two numbers: risk measured up to ten, and reward (the amount of upside),” Adler added.
Tesco has a 2.9 weighting in the £234m Schroder Global Equity Income fund the pair have overseen since March.
Performance of fund over 1yr
Source: FE Analytics
Over the last year the fund has delivered a 16.01 per cent total return compared with a 4.70 per cent gain for the average fund in the IA Global Equity Income sector and a gain of 9.51 per cent for the MSCI World index. It yields 3.12 per cent and has an ongoing charges figure (OCF) of 1.69 per cent.