The growth versus value debate is one that will never go away, it seems. Fund managers may forever argue about which style is better, with growth investors favouring those companies that are typically growing faster than the market and reinvesting in themselves.
Meanwhile, value investors generally favour those companies that have a stock market valuation that is below their intrinsic value and therefore have been mispriced, under the expectation that this will at some point correct.
The growth style has been in favour globally over the last decade since the financial crisis as a low-growth environment has seen investors pay up handsomely for those companies that have shown an ability to outpace the market.
Indeed, the MSCI AC World Growth index is up 153.16 per cent over the past 10 years, while MSCI AC World Value is up 102.09 per cent.
Yet many investors will say that value outperforms over the long term and if you compare the same two indices over a 20-year period, the results will show that the growth index is up 161.80 per cent but the value index is up 190.39 per cent.
Taking the debate to the emerging markets you get the same results over the two time frames for the MSCI Emerging Markets Value and MSCI Emerging Markets Growth indices.
AJ Bell head of active portfolios Ryan Hughes said: “The last few years have certainly favoured growth stocks with value being left way behind.
“Investors have been very much focused on anything that has the ability to grow earnings and has in some cases bid this up to very high valuations while traditional, less exciting stocks have been out in the cold.
“This has not just been restricted to emerging markets but has been a theme the world over.”
However, if we zoom in and look at the year-to-date returns, there is a difference between the global and emerging markets indices.
MSCI AC World Growth has outperformed MSCI AC World Value, but MSCI Emerging Markets Value has outperformed MSCI Emerging Markets Growth.
Performance of growth vs value YTD
Source: FE Analytics
While it is too soon to say whether this has transformed into a more long-term shift towards value in the region, Hughes said that the turn often only becomes obvious after it has occurred.
“The key question is what is the catalyst for this to change. It is normally the case that there is not just one trigger point for this switch in sentiment,” he said.
“Should confidence in the market really move then some of the very expensively priced growth stocks are likely to fall out of favour and there has already been some evidence of this with some Chinese internet stocks that have fallen back sharply this year.”
Such stocks include some of the largest in the emerging markets benchmark; Tencent, Alibaba and Baidu, which are down 23.32, 11.16 and 6.51 per cent respectively so far this year.
But Hughes countered: “However, this hasn’t yet translated into a stronger period for value stocks.
“The key to anyone investing on a value basis is patience. When the style comes back into favour, it is often very sharp and historically has outperformed significantly but calling the timing of this is very difficult.”
Should value stocks continue their recent outperformance of their growth counterparts in the region, investors may want to consider adding a value fund to their portfolio, if they haven’t already.
With this in mind, Hughes said Lazard Emerging Markets is a value fund that investors might want to consider.
The fund, which is managed by James Donald, is one of the best exponents of value investing in the emerging markets region, said the fund picker.
“The team are very experienced and understand the need to be patient in their approach and are comfortable investing away from the benchmark,” he said.
“With overweights to the telecoms and financials sectors, the value bias is clear to see while the fund also sits at an underweight in the technology sector.”
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
The fund has gained 104.44 per cent in the past decade, more than the MSCI Emerging Markets index (102.96 per cent) but less than its average IA Global Emerging Markets peer (104.64 per cent)
Chelsea Financial Services managing director Darius McDermott is another who would recommend Lazard Emerging Markets as a good value option for investors in the region.
He said: “Even though value has been out of favour, Donald has stuck true to his mantra and the process and the style that they have. He is a good emerging market manager despite not having had to market conditions that support his style.”
Ben Yearsley, director at Shore Financial Planning, said that he doesn’t have a preference for growth or value in emerging markets and noted that it is more important for investors to just get exposure to the asset class.
He said that despite having a bad year in 2018 in general, he’s a great long-term believer in the emerging markets story.
“What’s not to like about young, dynamic, growing countries with keys themes such as urbanisation and a burgeoning middle class,” he said.
“There will always be bumps along the road, but if you are buying at the current relatively low valuation and are prepared to invest for the long term, then I think you will make money.”
Yearsley said there might be a few reasons why value in emerging markets has outperformed recently.
The first is that, in times of stress value will outperform growth because investors will favour cheaper prices.
He added: “Don’t forget as well that growth stocks have further to fall than value stocks so if investors are dumping emerging markets indiscriminately then growth will undoubtably fall more.
“Investors pulling money out of index stocks will more than likely also be causing growth to fall more.”
However, for those looking to add a value fund to their portfolio in the region, he said that Pacific North of South EM All Cap Equity might be a good choice.
“The fund has a bottom up and clearly defined process with most of the time spent on company analysis and not top down macro calls,” he said.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
It only launched in November last year but since then has made a loss of 3.08 per cent, while its average peer is down 8.32 per cent and the MSCI Emerging Markets benchmark is down 6.54 per cent.
Finally, Willis Owen head of personal investing Adrian Lowcock said the JPM Emerging Markets Income fund could be an option for those looking for a value emerging markets fund.
He said the manager Omar Negyal is supported by a strong and extensive team that cover emerging markets and China.
“The process employed on the fund is robust, analysts conduct detailed work to assess the quality of a business before calculating expected returns,” said Lowcock.
“They assess five-year growth, dividends, change in valuation, and currency. The manager can then select stocks which suits the objectives of the portfolio.
“Around 60 per cent of the portfolio is invested in companies with a 3-6 per cent yield that can grow their earnings and dividends.”
The remainder of the fund is flexible and is spread across both high- and low-yielding companies, which Lowcock said gives the manager a better chance of achieving income and capital growth.
The fund launched in 2012 and has since returned 50.20 per cent, while its average IA Global Emerging Markets peer is up 48.27 per cent and the MSCI Emerging Markets index is up 61.64 per cent.