The nuances of value investing

It is unusual for global investment markets to move almost completely as one, with such moments usually coming at times of crisis. But in the last few months, a singular trend has driven markets, fuelled by good news and the rising tide of global stimulus.

The rotation from growth into value was almost unprecedented, after a decade in which growth stocks had dominated the markets, marked most notably by the near exponential growth of the FAANGs. Indeed, at the point of the rotation the valuation gap between growth stocks and value stocks was at a record high, leaving some to suggest that value investing might be over for good.

Of course, rumours of the death of value investing were greatly exaggerated. In the six months to 12 April 2021, the MSCI ACWI World Value Index returned 17.71%, against a 7.37% return for the MSCI ACWI World Growth Index.

Tapping into the value revival

Unfortunately, many investors were caught out by this rotation. As growth continued to flourish through the 2010s, many funds opted or were forced to change their investment approaches to a more growth-focused style. As a result, portfolios were often wholly or largely growth-oriented as the value rally began in November.

While investing on a backward-looking basis alone is rarely a good plan, several financial institutions, including JPMorgan and Barclays, have said that they believe the rally has further to run. One key driver is the gradual re-opening of major economies such as the UK and US, prompted by successful vaccination programmes. With governments indicating that they are likely to continue providing economic stimulus through extended welfare programmes for some time to come, it seems likely that a pent up spending spree is on the horizon.

Naturally, investors are now looking to add more value exposure to their portfolios. However, with so many funds on offer, it is worth considering what this actually means.

For some, a value allocation focuses almost exclusively on so-called “distressed” stocks, the kinds of companies that have experienced such challenging operational environments in recent years that some investors believe they cannot recover. An example here would be cinema chains, or even GameStop, prior to its Reddit-fuelled resurgence.

For others though, value is more nuanced. For the managers of Momentum Multi-Asset Value Trust (MAVT) this includes applying a value lens to a broad range of asset classes, and on a global basis too.

Refined value

MAVT has long been managed with a distinctive “refined value” approach. In practice, this means applying the same value lens the managers use for their directly-held UK stocks to a broad variety of asset classes located globally, accessed largely through third-party funds.

This combination is unique, offering investors a ‘core’ value allocation, alongside a differentiated approach to value in the other half of the portfolio. This combination also helps prevent the fund from being too defined by its value style, and the portfolio as a whole does not show a technical bias towards value, even as the managers use this as their investment lens.

The team is finding opportunities on both sides of their portfolio. On the UK equity side, the team agrees with the institutions that the value rally has a while to run yet and have maintained their already-overweight exposure in recent months on the basis of this conviction.

This is being driven by both bottom-up and top-down observations, with the team identifying the UK market as a whole as undervalued and reporting finding numerous attractive stock-specific ideas. UK leadership relative to global peers on vaccine deployment should enable the economy to recover quicker, and a pathway to economic reopening gives the team increased confidence in consumer-facing holdings which had been punished in 2020.

On the other hand, the team are finding a number of contrarian opportunities for the other half of the portfolio. As investors have become more accustomed to the value in renewable assets, these have included more esoteric and specialised ideas in this theme. An example is Cordiant Digital Infrastructure, which invests in digital economy infrastructure like fibre optics cables, following its IPO in February.

A proven formula

The distinct combination of UK-listed value equities and alternative assets at attractive valuations offers investors a truly distinctive ‘value’ allocation. And – although past performance is not a reliable guide to the future – the trust has a strong track record; over five years it has outperformed its benchmark while increasing its dividend on an annual basis.

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