David Brenchley
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Updated 06 Jul 2024
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This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

It’s impossible not to have noticed that growth stocks in the US have demolished everything in their wake in recent times. In the past 12 months, the MSCI USA Growth Index has beaten its Value counterpart by about 21%. That’s a pretty big margin of victory.

It makes sense, too. Rising interest rates led to a historic de-rating of American growth stocks through 2022, meaning they were probably due for a bounce. Meanwhile, investors have rewarded the companies set to drive forward and benefit from the emergence of artificial intelligence. Most of these happen to be fast-growing, US technology businesses.

So, with growth going gangbusters in what is by far the biggest and most important of the world’s stock markets, we must be in a growth market, right? Not necessarily. In Japan and the UK, value has been winning.

Certainly, Japan seems to have been the land of the rising value manager. The MSCI Japan Value index has outperformed the MSCI Japan Growth index by 14.3%. Again, there are good reasons why this is the case.

The corporate governance reforms in Japan have worked to benefit cheaper companies. In March 2023, the Tokyo Stock Exchange challenged lowly valued companies to get their price-to-book values above 1 times. This means that some of the first beneficiaries of Japan’s rally have been value stocks .

So, can these two distinct styles of investing in the two biggest regions within the MSCI World Index continue their ascents, or are we heading for a change?

USA

Certainly, trying to predict the return of a value market in America over any point in the past 15 years would have led to sub-optimal results. In pound terms, the MSCI USA Growth Index is up 1,330% in that time, compared to just 513% from the MSCI USA Value Index.

Even since the start of the 2020s, a decade that has been punctuated by the coronavirus pandemic, wars and spiking inflation, growth stocks have more than doubled, while value shares are barely up by 40%.

Growth has been helped by the continued wall of money going into funds tracking the S&P 500 index, where about 30% of all newly invested cash goes into the biggest six companies, which just happen to be AI-adjacent. Instead of being lazily dubbed the Magnificent Seven, Microsoft, Nvidia, Amazon, Meta, Apple and Alphabet have left Tesla behind to become the Super Six.

JPMorgan American (JAM) has perhaps a more balanced style of investing, but its top four positions are the first of the aforementioned Super Six. Still, it has one fund manager with a bias to growth and one with a value tilt, meaning it’s a core holding that has a history of outperforming its benchmark.

Perhaps if there is a next leg to the US stock rally, it’s smaller companies with a growth tilt. Just like value stocks, small firms have fallen behind large caps, but at some point the US market must surely broaden out.

The management team of Brown Advisory US Smaller Companies (BASC), led by Chris Berrier, focuses on quality companies in the small to mid cap space with attractive growth potential. BASC is overweight the technology sector, for example.

Japan

Growth equities in Japan haven’t been anywhere near as dominant over the past 15 years as America’s have. In fact, the gap between the MSCI Japan Growth and MSCI Japan Value indices in pound terms is 20 percentage points. During the tumultuous twenties, value has outperformed by a wide margin (45% to 18%).

With around 1,600 companies in the Japanese market still having a price-to-book ratio of below 1 and a return on equity of under 8%, it seems likely that the value rally has further to run.

While investment trust land isn’t blessed with Japanese value strategies, there are a couple of trusts that could stand to benefit.

Schroder Japan (SJG) is perhaps the closest stylistically to being a value play. SJG’s manager Masaki Taketsume seeks undervalued stocks for his portfolio, though he doesn’t invest purely on the grounds of something being cheap.

The average price-to-book ratio of a company in the portfolio is about 1.2 times, according to Morningstar, which is lower than the index, as is the average price-to-earnings ratio of about 14 times. The trust has recently announced an enhanced dividend policy that will see it pay out 4% of the average net asset value in each of its financial years.

Meanwhile, CC Japan Income & Growth (CCJI) was launched to take advantage of the corporate governance reforms instigated by former Prime Minister Shinzo Abe. Manager Richard Aston also looks for undervalued firms but focuses heavily on companies with growing dividends.

Best of the rest

UK value has trumped growth, again not hugely surprising since the UK market tilts toward value, with big weightings within the banking, oil and gas and mining sectors. The recent success of the Raspberry Pi IPO gives hope that our domestic market may be able to lure some fast-growing names to these shores, but value seems to be where it’s at for now.

Again, it could be worth backing smaller companies, which are looking cheap and have been ripe for the picking when it comes to M&A.

Rockwood Strategic (RKW) takes a private equity-style approach to investing in micro-caps, taking meaningful stakes in its concentrated portfolio of around 20 companies and working with management teams to unlock shareholder value.

From a global standpoint, perhaps it makes more sense to leave decisions such as value or growth investing to the experts. Alliance Trust (ATST) stands out in this regard, taking a multi-manager approach to investing. The ATST investment committee balances styles by picking the best managers around. Interestingly, the most recent manager addition was Dalton Investments, a value-focused strategy investing in Japanese equities.

Individual active fund managers can be very dogmatic in their approach, sticking to one style of investing, such as value or growth, and not deviating.

As the recent divergence in performance of style factors in the US and Japan prove, a properly diversified portfolio across regions, styles and assets classes is always the best way for ordinary investors to go, and investment companies can certainly help achieve this.

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