Rotation into Value

[vand]

This was a theme which ran in fits and spurts in 2021 - Moneyweek dubbed the "The Great Rotation" - and it seems like we are undergoing the latest wave in early 2022, as tech and growth stocks struggle badly and people suddenly want value again as the bond market sells off and pushes interest rates higher.

Only a small sample of course, but in the last 10 trading days:

FTSE 100: +0.5%
Global: -2.6%
QQQ: -5.5%

Anecdotally my own portfolio of mainly UK value/divi shares seems to be steadily motoring along and hitting new highs.

I notice that TMF is pretty much a value/divi based site, so people who have a natural tilt in that direction would I suspect also be seeing the same thing with their own portfolios. Just validates my opinion that when people pile into the market trackers claiming "there is no alternative" that there is always an alternative.

[88V8]

...when people pile into the market trackers claiming "there is no alternative" that there is always an alternative.

There can be.
The right picks at the right time.
Fixed Interest at yields c10% was one for me.
Otoh I assiduously ignored the ten-year US bull then decided to dip a toe just as others are getting out.
Carillion sank with me on board, so did Interserve and Woolworth and Speyhawk... I have a long history of being in the right place at the wrong time.

I think one can make a historic case for a range of strategies, depending on the start and exit point, but in the long run one has to be both skillful and lucky to beat the market, as witness the laggardly performance of many 'active' funds.

Me, I'm largely divi stocks, Fixed Interest, income ITs. It's not hard to beat the market on income, so long as capital performance doesn't matter.

V8 (the exponents of TR will be along in a mo)

[simoan]

This was a theme which ran in fits and spurts in 2021 - Moneyweek dubbed the "The Great Rotation" - and it seems like we are undergoing the latest wave in early 2022, as tech and growth stocks struggle badly and people suddenly want value again as the bond market sells off and pushes interest rates higher.

Only a small sample of course, but in the last 10 trading days:

FTSE 100: +0.5%
Global: -2.6%
QQQ: -5.5%

Flipping 'eck! We're a week into 2022 and already there is talk of some new paradigm shift in the media. What even is "Value" as referred to by Moneyweek? Who sets out to buy and hold shares that are not good value based on some criteria? Not me! If by "Value" they mean poor quality companies that have to scrape by to earn a profit, then I never want to hold those companies. If that means a period of underperformance then so be it, that is all part of investing in shares. To jettison an investment process that has got me to the point where I am financially independent in my mid 50's in favour of a "Value" approach that has failed for the last 20 years would be the very essence of insanity.

I have free access to read Moneyweek using my newly acquired library card and I read one issue before Xmas. I'd never read it previously. There's a first and last time for everything Tbh there is better informed content available for free on the AJ Bell Youinvest and Hargreaves Lansdown websites. It seemed to be mostly hot air and waffle with lots and lots of adverts. Don't let the media throw you off course, they have to write a constant stream of commentary so they can all get paid by the advertisers, and most importantly, so we all have something to wrap our fish & chips in next week.

All the best, Si

[scrumpyjack]

Quite agree Simoan. I suppose an alternative way of looking at it is 'value' means companies making good, real and sustainable profits now' as opposed to companies who may make good profits many years into the future but are not doing so now. In reality there is value in both. Avoid the declining dross either way!

[simoan]

Quite agree Simoan. I suppose an alternative way of looking at it is 'value' means companies making good, real and sustainable profits now' as opposed to companies who may make good profits many years into the future but are not doing so now. In reality there is value in both. Avoid the declining dross either way!

Ok. So Microsoft and Apple are "Value" then? That's good, I needn't sell them and invest the proceeds in BP and Lloyds

I suspect by "Value" they were probably referring to all the dross in the FTSE100 whose share prices have gone nowhere in 20 years e.g. big oil, banks, telecoms. Maybe things on low PERs with low margins with lots of debt that may benefit from inflation and/or higher interest rates? e.g. banks, insurance, telecoms etc. If that's the "rotation to Value" they are talking about then that would explain why my other half's long term "buy and forget" portfolio full of dross is up 4.3% in the past week, whilst I'm down 0.6%. Maybe I should tell her that the terrible underperformance of the last ten years has ended and we should crack open the Heidsieck Brut Reserve!

All the best, Si

[Dod101]

I am equally sceptical of so called 'value' shares but they are, from my understanding, shares which are found to be undervalued, that is below some price which a 'normal' investor thinks they are worth. Often to be found in high yielding shares when accompanied by a relatively low PE Ratio. As has been said, it fairly typically throws up 'old economy' shares such as are typically found in the FTSE100 or for that matter often in a HYP portfolio. 'Their year' has been discussed most years that I can remember, certainly for the last decade, about this time. One year, like the stopped clock, those soothsayers will be correct.

Dod

[simoan]

Well I just looked at the last few copies of Moneyweek and can see nothing about rotation into "Value". In fact, the front cover headline of the latest edition is "Hold Tight: Four risky stocks than can soar in the new year". Go figure! Not quite what I'd expect with regard to value. It contains the usual guff at this time of year i.e. performance of 2021 share tips and who's tipping what for 2022. Most interesting thing in the whole magazine is to see Matthew Jukes recommending an Orange wine as his "Wine of the Week"!

All the best, Si

[Adamski]

I've been having similar thoughts, and want to tilt my portfolio more to the UK and value. Think ftse has been at a discount since the brexit referendum, and got better chance of doing well in 2022; but we shall see.

[richfool]

Well I think there already has been a movement into or at least towards, value stocks, as investors have sold down technology growth stocks and particularly US tech stocks. This is evidenced by the fall in the likes of (IT's): USA and SMT, and the firming up of higher yielding BRSA (higher yielding US IT), LWDB and other higher yielding UK Equity trusts, and maybe even HINT (Global Growth & Equity trust).

[Dod101]

I've been having similar thoughts, and want to tilt my portfolio more to the UK and value. Think ftse has been at a discount since the brexit referendum, and got better chance of doing well in 2022; but we shall see.

With great respect, this is a typical comment for this time!

Dod

[TahiPanasDua]

There is an interesting article in the FT Money section today: "Investment and 2022's Multiple Risks". John Plender runs through most of the risks and unknowns affecting investment and does not over-simplify the horrendous complexities involved.

Of interest to this thread, he also discusses rotation into value, etc.

Well worth a read.

TP2

PS: Following a property sale, I have a large-ish sum awaiting investment. I have given much thought to possible strategies for an impending bust. Like everyone else, I have no idea if or when this will happen. Currently, I'm thinking of buying something like VHYL as an interim measure. It will provide a dividend while waiting. Being oriented to "value" shares, whatever they are, it should decline less come any bust allowing a modestly profitable rotation into growth stocks. I just can't get interested in the Ruffers, and Capital Gearings of this world. It's a personality thing.
I have given up any notion of repeating my astonishing timing of the Dotcom and GFC busts. Any thoughts of genius have been tempered by my absolutely consistent prognostications for the bond market. Unerringly wrong. Don't be tempted to follow me.

TP2

[scrumpyjack]

Yes a good article by John Plender. He is one of the pundits who 'knows he doesn't know' as I think Galbraith said.

He suggests bonds are as risky as equities and historically have done worse than equities in periods of stagflation, which he thinks is coming.

[NotSure]

..... Being oriented to "value" shares, whatever they are, it should decline less come any bust allowing a modestly profitable rotation into growth stocks......

But is this even true? From the article you linked: ".....It is worth noting that the 2021 Credit Suisse Global Investment Returns Year Book records that from the peak of the dotcom boom in 2000 to March 2003 US stocks fell 45 per cent, UK equity prices halved and German stocks fell by two-thirds......"

[tjh290633]

Perhaps they have just noticed that the FT350HY Index (HIX) is up over 2%, compared with the FTSE100 (UKX) only up 1.36%.

Maybe the market has changed its spots.

TJH

[BT63]

Yes a good article by John Plender. He is one of the pundits who 'knows he doesn't know' as I think Galbraith said.

He suggests bonds are as risky as equities and historically have done worse than equities in periods of stagflation, which he thinks is coming.

I don't know what is coming but I suspect however things play out it will be challenging for all of us.

Here are what I think are the most likely outcomes:

1. The Fed raises rates and quantitative tightening, causing a long and deep stock market bear and inflation quickly drops back down to target due to a recession caused by the negative-wealth-effect of falling stock markets.
- or -
2. The Fed talks tough but mostly sits on its hands for fear of popping the bubbles pumped up by QE, resulting in chronically elevated inflation.
- or -
3. A hybrid of both of the above; a whipsaw, where the Fed begins raising rates and ending QE etc, the stock market starts looking like it might be mauled by the bear, so the Fed panics and restores ZIRP and QE to keep things afloat while allowing inflation to remain elevated for many years.

-

I think some of the most successful portfolios over the next decade will be quirky ones. Something crazy like 50% fixed-rate US treasuries and 50% gold, not that I could bring myself to hold such a portfolio with what look like guaranteed-loss-making bonds.

[BT63]

Perhaps they have just noticed that the FT350HY Index (HIX) is up over 2%, compared with the FTSE100 (UKX) only up 1.36%.

Maybe the market has changed its spots.

TJH

It feels like a long time since value investing rewarded investors but I don't believe value investing is dead.

Many of the FTSE's highest yielding/lowest-rated shares look tempting.
I can't recall many, if any, times when there were so many decent yields available, other than near the bottom of market crashes.

[TahiPanasDua]

..... Being oriented to "value" shares, whatever they are, it should decline less come any bust allowing a modestly profitable rotation into growth stocks......

But is this even true? From the article you linked: ".....It is worth noting that the 2021 Credit Suisse Global Investment Returns Year Book records that from the peak of the dotcom boom in 2000 to March 2003 US stocks fell 45 per cent, UK equity prices halved and German stocks fell by two-thirds......"

Of course you are right. However, within those calamitous drops there were obviously a range of outcomes. Not every US stock fell 45% or more but I have not seen data on value share performance. My own "value" shares have performed better than average in bigger downturns and my ambitions are modest these days. The author's figures are telling but, quoting facetiously, I only predict the future. I can't help feeling the US tech sector is in for a substantial hammering.

TP2

[Newroad]

Hi All.

There's a bunch of angles to this - I consider two below.

What's recently been hammered on the Nasdaq is the high multiple, no cashflow stocks and similar. Some others have done either fine or not so bad.

It seems to me also that, on balance of probability, that "value" (if it can be defined) is likely to do better than "growth" in the near term. But how to play that analysis, if right?

I'm not going to, but if I were, I'd probably switch the passive component of my equity investments (circa 35%) from VWRL/VWRP to VHYL - I think that tilt would likely catch a higher proportion of value stocks.

Regards, Newroad

[Lootman]

..... Being oriented to "value" shares, whatever they are, it should decline less come any bust allowing a modestly profitable rotation into growth stocks......

From the article you linked: ".....It is worth noting that the 2021 Credit Suisse Global Investment Returns Year Book records that from the peak of the dotcom boom in 2000 to March 2003 US stocks fell 45 per cent, UK equity prices halved and German stocks fell by two-thirds.

Of course you are right. However, within those calamitous drops there were obviously a range of outcomes. Not every US stock fell 45% or more but I have not seen data on value share performance. My own "value" shares have performed better than average in bigger downturns and my ambitions are modest these days. The author's figures are telling but, quoting facetiously, I only predict the future. I can't help feeling the US tech sector is in for a substantial hammering.

The idea that the US market will fall more because it is the most over-valued, or because it is the most growthy, hasn't been the case in past crashes, as NotSure notes. The US market is often seen as the most stable and secure, both because of the sheer size and liquidity of it, and because free-market capitalism is never under political threat in the US in the way it can be in Europe and Asia.

Throw in also that the US dollar and US Treasuries are safety instruments which investors flock to in a crisis.

I would generally reckon that the UK market would do worse in the next bear market, as finance is a much bigger sector in the UK than the US. We certainly saw that in the 2008 financial crisis, which hit the UK hard. Nor did the UK escape the dotcom bubble fallout.

In those market crashes being in "Value" didn't help. After all the financials are value shares. As are energy shares which do badly in an economic contraction. Ditto industrials, materials etc. What did do well in 2008-2010 were non-cyclical sectors like consumer staples, utilities and healthcare.

Perhaps Growth versus Value isn't the most helpful distinction, given the above. Cyclical versus non-cyclical or cyclical versus defensive might be a better indicator of which sectors do well in a crisis. And that doesn't mean that the usual suspect UK HY large-cap value shares will suddenly become a world-beater. After all the chronic under-performance of the UK market for the last 30 years isn't just the result of not participating in bull markets, although it often did not. It is also a function of not being particularly defensive during the bad times either.

The UK is 4% of global market cap (down from 10% 25 years ago which again shows the relative under-performance). Let's assume that UK Value is 3%. How much over-weighting of that seems reasonable, particularly if you wish to avoid single country risk?

[vand]

Quite agree Simoan. I suppose an alternative way of looking at it is 'value' means companies making good, real and sustainable profits now' as opposed to companies who may make good profits many years into the future but are not doing so now. In reality there is value in both. Avoid the declining dross either way!

Ok. So Microsoft and Apple are "Value" then? That's good, I needn't sell them and invest the proceeds in BP and Lloyds

I suspect by "Value" they were probably referring to all the dross in the FTSE100 whose share prices have gone nowhere in 20 years e.g. big oil, banks, telecoms. Maybe things on low PERs with low margins with lots of debt that may benefit from inflation and/or higher interest rates? e.g. banks, insurance, telecoms etc. If that's the "rotation to Value" they are talking about then that would explain why my other half's long term "buy and forget" portfolio full of dross is up 4.3% in the past week, whilst I'm down 0.6%. Maybe I should tell her that the terrible underperformance of the last ten years has ended and we should crack open the Heidsieck Brut Reserve!

All the best, Si

Hey, I understand the skepticism but every strategy has its good and poor runs. If you have an alternative strategy then by all means put it forward. People mocking value over exciting new (and not so new) growth companies is nothing new - people mocked Buffett relentlessly in the late 90s - but what are you paying for that growth is the question you should be asking.

I would like to argue that the idea that a good company is a what makes good investment needs is nonsense. What makes a good investment is not the quality of the asset, but the price that you pay for it. I like to quote this passage from Howard Marks who I think put it very well:

"When I started I worked for a New York bank, and the bank practiced like all the other banks something called nifty 50 investing and it bought the stocks of the 50 greatest, fastest, growing companies in America, IBM, Xerox, Kodak, Polaroid, Avon, Merck, Lilly, Texas Instruments, Hewlett-Packard. These companies were so adored and people were so sure that nothing could go wrong with them and people were so convinced that they would be fast growing in terms of profit that their prices just got too high. And if you had joined my bank when I did and bought these stocks and held them for five years, you would’ve lost almost all your money. And that’s an amazing thing. They were great companies and you could’ve lost, as I say, almost all your money, 80%, 90% in many cases.

Ten years later, I switched to high-yield bonds and I was asked to start the bank’s portfolio in high-yield bonds, which was one of the first from a financial institution. Now, I’m dealing with the worst companies in America - I say that a little bit Ironically but, you know, by definition, high-yield bond issuers are not gilt-edged companies - and am making money steadily and safely.

So what did that experience tell you? If you can lose a lot of money in the best company and make a lot of money steadily and safely in the worst companies, what are the lessons? The main lesson is it’s not what you buy, it’s what you pay for it, that determines whether something is a good investment or a bad investment.


One of the ways I like to say it, good investing is not a function of buying good things, it’s a function of buying things well. People should think about that and they should think about it until they understand it because if you don’t know the difference between buying the good asset and making a good investment, then you’re not gonna be a successful investor. Good investing comes from buying things for less than their intrinsic value.

As my own experience has shown, there is no asset which is so good that it can’t become overpriced and thus a bad investment. There are very few assets which are so terrible that they can’t become under-priced and that’s a good investment."

Howard Marks - interviewed by Meb Faber