Liontrust has warned that placing too much emphasis on style labels can prove reductive when investing for the long-term and could lead investors to potentially missing opportunities.
After a decade of underperforming growth as a style, last year’s vaccine breakthroughs sparked a resurgence in traditional value sectors over the first half of 2021.
Putting aside concerns that this rotation may already be petering out, Jen Causton, investment manager on the Liontrust multi-asset team, said what the rally has reinforced is that these style terms are broad labels and that there is far more nuance in markets than a simple growth/value divide.
Having underperformed growth as a style by 34% in 2020, Causton noted that in the first six months of 2021, value generated double the returns of the former.
“The obvious assumption, against such a backdrop, would be the nominally growth-focused US has had a torrid time but, in fact, the market was simply back to performing in line with the rest of the world, with its value stocks taking up the reins across large, mid and small caps,” she said.
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Look at the detail
The concern for Causton is that fear and greed continue to tempt investors into trying to time markets, with the recent value rotation potentially encouraging people to jettison US equities when, in fact, performance has actually remained consistent.
Meanwhile, often viewed as a more value play, she added that it is perhaps not surprising that European equities have been among the best-performing stock markets in 2021. However, she said that when this performance is analysed in more detail, the more pertinent driver has been smaller and medium-sized companies across investment styles.
“Quality and growth, which held their own during the value rally, have now taken the lead over the year-to-date,” she said.
“Europe is actually more of a cyclical market as an exporter to the rest of the world, so it is well placed to benefit from improving economic conditions as the world continues to open up: within the ‘value’ cohort, more cyclical sectors have outperformed traditional defensives such as tobacco and utilities.”
Inevitable push back
Causton said similar nuances are required to get the full picture of what has been driving the performance of other regions this year.
For example, while growth as a style has lagged recently owing to the crackdown on technology companies in China and uncertainty around this increased political risk, Causton noted that emerging markets and Asia – two traditional ‘growth’ areas – have actually demonstrated a similar profile to Europe, with small caps outperforming so far this year.
She added that Japan meanwhile, which is seen as more of a value play, is seeing a similar trend to the US, with value and high dividend businesses outperforming year-to-date and very little dispersion across market caps.
“More recently, concerns about covid variants and economies failing to hit growth expectations have slowed the value rotation, with investors trimming exposure to cyclical, value and small-cap stocks and moving back into the familiar embrace of technology, growth and large-caps,” she added.
For Causton, after such a strong recovery, some push back against the reflation was inevitable. However looking forward she said the team is always cautious about extrapolating short-term data into long-term outcomes and warned against an overreaction, both positive and negative.
“There may another leg up in value to come as we head into the autumn, particularly as many growth sectors remain prohibitively expensive,” she said. “Value has underperformed for many years and we feel the recent rotation may ultimately prove the first part of a multi-year retrenchment.”
