Value and growth, as we saw in Spur of the momentum, are often viewed as two sides of the same coin. If your portfolio is 50% in value-oriented investments, therefore, it is fair to suggest the other 50% is in growth – or, as they tend to have it in the US, ‘momentum’ – stocks. If you are 30% in value, then the chances are you are 70% in growth.
That being the case, visitors to this site are unlikely to be too surprised which way up the coin tends to fall, here on The Value Perspective. What they might be surprised to find out, however, is just how unusual that makes us in the current investment environment – and especially in the context of UK equity income investing.
If you ask them nicely, there are analysts at Morningstar who will break down portfolios by investment style and so we asked them to do just that for all the funds in its UK Income category. We then made the reasonable assumption that, if a fund has more than 50% in value-oriented stocks, it has a value focus and, if it has more than 50% in growth stocks, it has a growth focus.
The funds that make up Morningstar’s UK Income sector boast a chunky £87bn in assets under management. We disaggregated this figure into the percentage value run by each investment house and then ranked everything according to the degree to which they are focused towards value or growth. The result is the following chart, which offers an arresting picture of the sector as a whole.
Source: Schroders, Morningstar Direct. 31 May 2016
As you can see, 87% of all £87bn of funds under management in the UK Income sector have a greater than 50% bias to growth, which of course means just 13% have any sort of tilt towards value. Prominent in the former camp is the vertical line towards the right of the chart, which represents the £18bn one investment house has across its stable of growth-oriented income portfolios.
In a similar vein, towards the left of the chart, the great majority of the £5bn or so of assets with a 60% or higher tilt towards value are also run by a single investment house. We presume its identity goes without saying and so will instead concentrate on what this chart is saying – most obviously that, as things stand, almost nobody wants to touch value.
That is because value pretty much embodies everything investors currently find problematic – commodities, banks, volatility and so on. In contrast, growth is a much easier decision for investors – at least at first glance – and there is certainly no denying a lot of the funds that make up the right-hand side of our chart can point to excellent 10-year track records.
Yet we know markets are cyclical over time. We know businesses and sectors – whether they have been doing well or poorly – revert to the mean over time. And we know that – again, over time – value has a long, long history of outperforming growth. All of which means the funds on the right-hand side of the chart – and their investors – represent a strong bet against history repeating itself. Over time.
The chart also has us wondering about the way many investors will say they like to diversify their income exposure by blending together different funds with different holdings. Well, of course that is possible but investors taking this approach with UK equity income funds might want to revisit just how diversified they currently are.
Certainly, if you were to pick two funds at random from the UK Income sector today, with a view to blending them together, the odds strongly suggest you would end up with two portfolios of very similar stocks and not a great deal of genuine diversification. You would only achieve that by blending two funds with different investment styles.
As keen students of behavioural finance, here on the Value Perspective, it does not come as much of a surprise to see such a huge bias to the investment style that has performed so well over the last decade or so. Of more interest to us, however, is the huge risk we believe this positioning now poses to the great majority of investors in the sector – and the great opportunity it presents to our own investors.