Stuck in a rut, managers of value-based funds are taking on fast-growing stocks
The fear of missing out appears to be taking hold of some value-based investment managers, who are letting some growth-based investment picks seep into their portfolios — and courting disaster during the later stages of an economic cycle.
“Value stocks … have been stuck in a rut for most of the nine-year rally in US stocks,” noted a recent report from the Wall Street Journal. “The Russell index of 1,000 of the biggest value stocks in the market has fallen 2.1% in 2018, the fifth straight year—and the 10th of the past 11 years—that the index has lagged behind its growth counterpart, which is up 6.9%.”
Critics of value investing contend that traditional measures of value do not apply as well today, when passive investing strategies and asset-light tech companies are making their mark. Finding it harder to argue, long-time followers of Buffett have started dipping their toes into momentum and event-driven trades, crowded positions, and investments in fast-growing companies like Apple and Netflix.
But most analysts believe that the US is in the later stages of an economic cycle, suggesting an impending pullback in stocks. That means investors who are just now rushing into growth strategies may be doubly punished if the pendulum happens to swing back in favour of traditional value stocks.
Still, many value investors have found reasons to let growth companies creep into their portfolios. Amazon or Netflix, for example, are purportedly still undervalued by the broader market in spite of their large revenue growth. Others have cited the need for “portfolio window-dressing” to boost returns — or simply avoid being left behind.
“The FANG stocks are so dominant in those benchmarks that to not own them, you got really hurt the last few years,” Eddie Perkin, chief equity investment officer at Eaton Vance, told the Journal.
Meanwhile, the BlackRock Advantage Large Cap Value fund has reportedly eschewed popular tech stocks, instead using fund flows and other information to pinpoint crowded positions and find names of companies that may have been left behind. The fund has invested in semiconductors — not a traditional play, but it’s becoming attractive to more investors as demand for chips grows.
“Traditional value styles of buying cheap stocks [have] been in the doldrums for a long time,” said Richard Mathieson, portfolio manager of the fund.
The 2008 financial crisis might have had a hand in value’s current woes as well. To Laton Spahr, the portfolio manager of Oppenheimer’s value fund, it was a turning point after which accommodative monetary policies broadly lifted asset prices at the expense of value managers.
“We had to become slightly more tactical and trade a little more,” said Spahr, whose fund has been working on finding banks that could surprise the market with higher capital returns or faster dividend growth. “There’s more awareness of what the catalyst events are … We trade our portfolios 20% more than we did 10 years ago.”