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Value

Normally we like to start our blogs with a pithy title but in this case we’ve started with a one-word title. It reflects the ongoing discussion in the financial trade press about value investing versus its growth counterpart. Given the US election and the increasing likelihood of one in the UK next year after the ruling over executive powers and ‘Brexit’, I’m surprised it manages to take up so many column inches but we have been asked by one of our clients for our view on growth versus value.
The growth versus value discussion isn’t one that normally occupies our minds.  The relationship warrants little more than a cursory glance to us at TBAM.
Defining value is in itself a conundrum. It means different things to different investors.
To us and importantly, the one ‘value’ manager we hold, it means businesses trading at well below their intrinsic worth. The top participant in the MSCI World Value Index is Microsoft (2.6%); how times change. For many that is still a growth stock not least since the change of CEO in 2014. The top ten also contains Johnson & Johnson and Proctor & Gamble, names you might find held in Fundsmith or Evenlode Income – popular, strong performing funds but would they classify themselves as value investors? The index also contains Pfizer, yes – really. The MSCI World Value Index like many such indices is imperfect at best.
The relationship may have some predictive element of impending trouble for equity markets as before and we should bear in mind that we have just witnessed seven years of extraordinarily loose monetary policy which has inflated many asset prices.  It has also encouraged many companies not least those in the US, to leverage the balance sheet and buy back stock.  Some, mentioning no names, have borrowed to sustain dividends – a red card offence in our book.  But borrowing has been dirt cheap thanks to QE.  Many of those companies are in the value bucket and many/most are large cap stocks which brings me to my next point.
This appears to be a discussion put forward by consultants advising large investors managing their assets through large asset managers seeking to beat conventional indices.  Having banked the growth trend should they now tilt towards value, in other words, having eschewed investing in banks, miners, etc, is it now time to close the bet and maintain the alpha?  That can also be done by ETFs.  Some large banks are cheap on a price to book basis apparently; but what’s in the book?!
For us the modern value that is sustainable could be a theme like infrastructure which has a political wind behind it.  If we are saying the value/growth relationship is a pointer to tougher equity markets ahead, should we increase microcap which has a history of doing well in tough times except for liquidity events and is probably a growth story but also beyond the reach of large investors? Should we look beyond that argument to find one or two of the few decent long/short equity managers or even those that encompass what to us is proper factor investing?
In our portfolios we have exposures to all of these but there isn’t a value/growth demarcation line.  Recently we were asked if we should be allocating more to commodities to reflect an upturn in global economic activity.  Our response was that we had already been looking at those materials needed for the modern world and added a manager that benefited the portfolio’s risk/reward relationship.  We didn’t assign a growth or value tag to that holding.
Value and growth and relative allocations to mainly large cap indices are for large investors, their consultants and large asset managers.  We fail to fully comprehend why retail investors hinder themselves with this burden when they need not.
One final observation – the world’s most famous ‘value’ investor’s company appears at number 8 on the list of top ten companies in the MSCI World Growth Index. I rest my case.

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