Published on: July 24, 2020

Hello to you all and welcome to this week’s News, Views and Truths

As detailed in last week’s blog, we are currently making changes to our centralised investment portfolios for the coming year, in conjunction with our investment partners, Morningstar.  This is a very resource-heavy time of year for myself and the rest of the Investment Committee as it sets the scene for the next 12 months.

We have three themes that are dominating our thinking at this moment in time and as such, we have spent considerable time looking at how each portfolio is positioned to reflect these.  Last week I detailed the first theme – inflation.  This week, on a more positive note, I will detail our second theme.  Innovation.

There has been much written lately about the current dichotomy within global equity markets; the performance of growth stocks versus value stocks.  I have written about this in previous blogs, but as a recap, value stocks are traditionally seen as having strong current cash flows that will slow over time, while growth stocks have little or no cash flow today, but are expected to gradually increase over time. 

Over the past 10 years, growth, as an investment style has comfortably outperformed value, as detailed in the table below.

Source: Morningstar

My inbox is inundated, every, single, day with articles, yearning for a mean reversion of value back to the performance of growth.  Whether this is growth falling to the levels of value stocks, or value stocks rocketing up to match the performance of growth; the value camp simply does not care.  They just need to see value perform.

And looking at the chart above, you also could believe that to be true.  Until you see the chart below.

Source: Morningstar

This is the same chart, just rolled back to 1975.  For the vast majority of the past 45 years, value stocks have outperformed growth.  So, my opening gambit is, are we just seeing growth stock mean revert to value?  If we are, strap yourselves in investors, as we ain’t seen nothing yet.

Getting that introduction out of the way, when I say “value stocks” and “growth stocks”, what do I actually mean?  Well, looking at the definition previously, value stocks are those index incumbents that fall into more traditional sectors; banking and finance, tobacco, mining, oil and gas, utilities.  Basically, everything that makes up the FTSE 100.  

On the other hand, growth stocks tend to be innovators; technological leaders that disrupt traditional industries.  Basically, everything that makes up the US Nasdaq 100.  And the performance differences between these two could not be starker.

Source: Morningstar

Again, my inbox is inundated with commentary on how the current performance of the US equity markets, driven by the performance of technologically innovative stocks which are growth stocks by nature, is a bubble and that investors should sell these and buy traditional value stocks.  Because they are cheap.

Sell your Tesla and buy a Vauxhall because it’s cheaper.  

Commentators harken back to the 2000 Dot-com crash because that’s what happens with tech stocks, right?  Everyone will learn their lesson and revert back to the old ways, right?  The global theme of decarbonisation will disappear, right?  The high street will suddenly become so attractive that everyone will emerge from their homes and forget everything about online retail, right?

The difference between 2000 and 2020, is the entire world.  Global interconnectivity is a part of daily life now and that was not the case in 2000.  And I acknowledge that the differential between growth versus value; new versus old, innovation versus tradition, is considerable in index performance terms.  But perhaps it’s that way for a reason?

I’m sure you all thought Kodak would forever develop your camera films back in 1990…

Stock markets change and it is our belief that the coronavirus pandemic will be the catalyst for increased change with the UK equity market.  We believe that the indices will change in terms of constituents as innovative growth companies increase in attractiveness to investors, in the same way as we have seen in the US.  As such, we are increasing our allocation to those managers who have a defined track record of selecting tomorrow’s winners, with a clear focus upon growth stocks.

And I fully appreciate that many within the industry will disagree with me.  For the largest part of my career, the most consistent and popular funds were value dominated.  Equity Income funds were a stalwart of investors portfolios; if you held direct stocks, you had BP, Royal Dutch Shell, British American Tobacco – you may still do.  You probably still do.

It was safe.  It was easy.  It was consistent.  Genuinely, there was an old adage of “no one ever got sacked for holding Neil Woodford,” as his performance from 2000 was stellar, through his singular focus upon traditional, dividend-paying, value stocks.  Yet times change and that inability to change, by some, by perhaps many, is driving the underperformance of UK equity allocations.  

We do not believe this is a flash in the pan.  We do not believe that this is a bubble.  We believe this is a paradigm shift, exacerbated by the global pandemic and investors portfolios must change with it.

This week’s “When Andrew Met…” video is on the website here and features George Cheveley, manager of the Ninety One Global Gold fund.  Gold is perhaps the most talked-about asset of 2020 and we discuss the prospect for the yellow metal’s price, along with the benefit of diversifying into mining stock.

Once again, my weekly podcast is also live here, with this week’s guest being Swetha Ramachandran, manager of the GAM Luxury Brands fund.  This is a genuinely fascinating interview as Swetha outlines why investing in luxury brands is a very interesting portfolio diversifier, even within the depths of a global pandemic. 

I am off next week; I’ve managed to find 5 consecutive days off for the first time this year and so it will be all silent on the western front for the next week.  However, I will be back the week after with more commentary and opinion.  Take care, stay safe and I will see you all in two shakes of a lamb’s tail.

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