A trust for all seasons

Listen in on any conversation between investors, professional or amateur, and the odds are the unending debate between ‘value’ and ‘growth’ will at some point crop up. In some ways it can feel a bit pointless.

That’s because for much of the past decade the growth crowd have been able to laud it over their value rivals. Buying stocks at high valuations, on the basis that future cash flows will justify doing so, has proven a solid strategy for much of the post-financial crisis era. So much so that in some cases, funds have shifted course into growth or wound up their value-driven strategies altogether.

And yet as we entered the new year, all this unbridled optimism came crashing down. Whether it was fears of inflation, a belief that fundamentals had started to lag too far behind share prices, or conflict in Europe, many highly valued growth stocks saw dramatic falls in price.

In contrast, value stocks have been relatively stable or even seen some gains. Looking back at the 12 months up until the end of February, the MSCI World Value Index increased in value by 19.1% on a total return basis. The MSCI World Growth Index increased by just 11.2% over the same period.  

The end of the growth boom?

It’s still early days and the world is feeling even more unpredictable than it normally is, but there are some signs the reversal into value stocks may be more permanent than growth investors are hoping for.

Inflation appears to be the primary driver. Higher prices do not seem as transitory as they did two years ago, when central banks began churning out vast sums of cash to keep economies afloat. Any subsequent rise in interest rates looks likely to squeeze some of the eye-watering multiples that many stocks have been trading at.

Of course, even if ultra-low interest rates were likely to continue, it would still be hard to justify some of the valuations we’ve seen in the market during the pandemic. Companies debuting on the stock market with multi-billion dollar price tags when they’d never made a penny was likely more a symptom of euphoria than any carefully considered valuation metrics.

Those sorts of businesses cannot continue to attract investment indefinitely and it seems investors may have started to realise that, at a minimum, they should be earning something before commanding such high prices.

Not all bad

Having said all of this, it’s worth keeping in mind that even if value investors may not have been the star performers of the 2010s, they weren’t always poor performers either. In fact, plenty of value-oriented investment trusts still delivered the goods for shareholders.

Momentum Multi-Asset Value Trust (MAVT) is one example of this. The trust’s objective is to deliver a total return that’s equal to the consumer price index plus 6%. It also seeks to pay a rising dividend that increases in line with inflation.

As its name suggests, the trust invests across different asset classes and geographies. At the time of writing a little over half the portfolio is in equities, with about 33% in UK companies and another 21% in European stocks. Specialist assets comprise a bit more than a third of the portfolio and the remainder is made up of cash, credit, and defensive assets.

The trust has usually met its objective over the past decade. In the 10 years up until 03/03/2022, the trust’s shares delivered a compound annual growth rate of 9.83% on a total return basis. Given its focus on value and skew towards the UK, which has also seen serious underperformance since Brexit, this is arguably even more impressive than it otherwise would be.

Headwinds to tailwinds

The trust’s managers were able to deliver those results, and not fall off the track as some other value funds have, because of the approach they take to the market.

Fund manager Gary Moglione uses a refined value process that attempts to separate the good from the bad in the value space. That has meant not getting stuck in the value trap and buying firms that look cheap but have ended up performing extremely poorly.

The ability to invest across asset classes has helped too. Investments in alternatives, like music royalties, along with green energy infrastructure and rental income, have helped to support both the trust’s capital appreciation targets, as well as its income goals.

These are also the sorts of assets that look more likely to perform well during a period of inflation. Streamers, energy producers, and property owners can all raise their prices in line with currency devaluations.

Obviously these are attractive qualities for a trust to have in the environment we find ourselves in. But what’s perhaps just as reassuring is that MAVT’s managers delivered strong results, even when there were major macroeconomic trends working against them.

Future success is never guaranteed but investors may want to keep an eye on the trust now that some of those problems have started to disappear and some tailwinds have emerged in their place.

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