Value managers have underperformed their growth counterparts by roughly 50 per cent during the last 10 years, but there was a reversal of the trend in the December quarter, with major banks and energy providers coming out on top.
Fund manager Maple-Brown Abbott recently insisted the upturn is set to persist into the future.
However another Australian boutique, Insync Funds Management, has warned part of the rotation into cyclicals such as banks, industrials and turnaround businesses has been driven by a greater consensus around a pick-up in growth and inflation.
But the firm believes it is unlikely that the low-inflation regime of past decades will come to an end anytime soon.
John Lobb, portfolio manager at Insync noted the recent outperformance of value sectors such as banks and energy companies is “fairly typical coming out of a recession”.
“Value managers, I believe need a very different world from the one growth managers do to produce outsized returns,” Mr Lobb said.
“Value managers have typically performed well during periods of economic resurgence and reflation.”
The turnaround is expected to be short-lived, with Insync betting that value managers will not continue their winning streaks through ongoing technology disruption and transformation.
The investment firm has forecast lingering low growth and low inflation, rather than the traditional economic cycle for some time. In this outlook, growth and value managers can both gain advantage at different stages of the cycle.
“It just doesn’t feel to me that the value argument is sustainable when there is little evidence we will return to economic normality as we knew it,” Mr Lobb said.
“Fast paced change and technological innovation is the new normal, and aside from the revaluation trades on the back of the COVID-19 correction, we don’t see the level of sustainable economic growth that will support value management long term.”
One major headwind pointed to is the collapse in the velocity of money despite a rapid growth in money supply. Unless central banks can find a way to encourage more aggressive lending, the velocity of money will remain a headwind to the “reflation trade”.
Further, the relation trade has also been driven by optimism around the Biden stimulus package in the US. Insync has argued the money could have been better deployed into infrastructure, which it believes is more likely to deliver higher sustainable growth and inflation rather than short-term welfare benefits.
The investment firm also prefers to avoid characterising its manager style, instead presenting its primary focus as to how businesses and the world will be operating over the longer term.
“We prefer to look at the world with a longer lens that identifies the firms most likely to succeed through pervasive change,” Mr Lobb said.
“We focus on highly profitable and innovative firms investing heavily in R&D to deliver sustainable metrics and steer clear of high growth firms that are generating strong sales growth but relatively low levels of profitability.”
Sarah Simpkins
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].
