Growth has appeared to be the better investment strategy in the longest bull market in history. But will it continue to lead the pack in the years ahead?
“After a decade of stock market dominance by growth, it seems like the market is gearing up for the rise of value,” says Adriaan Pask, CIO at PSG Wealth.
Stimulative policies from the Fed and other central banks have managed to support the bull market, increasing money supply while maintaining low interest rates for over nine years.
However, this may be set to reverse because central banks are now gravitating towards a more normalised environment of higher interest rates.
“A blend of higher interest rates and rising inflation shows a lot of promise for value strategies, and a potential trade war will only fan the flames,” says Pask.
“We are in an ageing bull market that is not trending strongly upwards anymore. During a late cycle, value shares in general provide better protection than growth shares, and we believe that value will be an attractive strategy going forward.”
However, Pask cautions that diversification is always crucial and that investors should not be pigeonholed into a single strategy.
“Value investing provides a margin of safety, and together with the upside of a great growth stock, this makes for a well-diversified portfolio.”
Understanding value vs growth
Value investors believe the market overreacts to daily news, which results in share price movements that are not a fair reflection of the long-term fundamentals of a company. In other words, value investors believe they are buying shares at less than their intrinsic value.
Growth investors, on the other hand, seek shares or companies whose earnings are expected to grow substantially at a rate that is above average when compared to the overall market. In other words, a growth investor is not worried about the current price of a share; they are more interested in the earnings potential or the ability of the company to have good earnings growth.
“There is no all-weather solution for optimal investing; if one strategy was definitively superior to the other, the other probably wouldn’t exist,” says Pask. The reality is that over time, certain styles have performed better than others.
“Value investing has traditionally outperformed during periods of market stress, whereas growth investing outperforms when markets are performing well,” says Pask.
Market events pointing to a resurgence of value investment
“The increasing bearish mood of global markets, combined with value shares being at historically low valuation levels after extended periods of underperformance, has created an ideal environment for a value strategy resurgence,” says Pask.
“During periods of recovery, investors become more aware of, and concerned with, affordability and start their search for discounts as a measure of safety. This creates a demand for value shares and usually leads to a material re-rating of this style,” says Pask.
Diversification always crucial
“A portfolio consisting only of value shares would be highly exposed to macroeconomic risks, causing more problems than it would solve,” says Pask. “Therefore, investors also need to understand the risks adhering to a specific investment style could potentially introduce to their portfolios.”
“Diversification is key, and a balanced portfolio of bonds with significant exposure to value stocks would improve the risk-adjusted return and greatly reduce the maximum drawdown value and overall volatility as compared to a pure Global Value Index,” says Pask.
By combining different investment styles in a holistically balanced portfolio, multi-managers are able to add further value to their clients.