Full tilt II – Not knowing their exposure to value or growth is a much greater risk than investors realise


Nick Kirrage

Nick Kirrage

Fund Manager, Equity Value

You may remember the chart below, which we discussed in detail in Full tilt. It offers an arresting picture of the investment style bias – that is, towards value or growth – of the various funds that make up the £87bn Morningstar UK Income sector. As you can see, 87% of all funds under management there have a greater than 50% bias to growth, which of course means just 13% have any sort of tilt towards value.


Source: Schroders, Morningstar Direct, based on Morningstar Income Category using fund data available at 31 May 2016


Turn the clock back 10 years and things were a good deal more balanced. In 2006, as our next chart illustrates, some two-fifths of the almost £40bn funds under management in the UK Income sector was in value and three-fifths in growth. Furthermore, you will notice the line is much more vertical than the chart above, indicating there were far fewer extremes in terms of value and growth.


 Source: Schroders, Morningstar Direct, based on Morningstar Income Category using fund data available for 31 December 2006. Excludes funds with no Equity Style % available at end 2006


Should you need an explanation for the huge difference in the two pictures above, you need look no further than our next chart. Showing the relative returns of value and growth-oriented unit trusts, as categorised by Morningstar, over a range of time periods, it neatly illustrates just what a tough decade value has had versus growth – and consequently why it is now so short of friends.


Source: Schroders, Morningstar Direct, based on Morningstar category UK Large-Cap Value Equity relative to UK Large-Cap Growth Equity. Total returns GBP, periods to 31 May 2016, periods greater than 12 months are annualised


As we have argued in articles such as All in the price, the one constant in more than a century of investing is human beings – markets are cheap when we are fearful and they are expensive when we are greedy. We are, in other words, systematically exploitable – at least by those investors who are prepared to swim against the tide and to take a long-term view.

 Over 100 years, then, over 50 years and over 20 years, history suggests that a value strategy works. Over the last 10 years, however, there has unarguably been a better game in town and its name is quality growth. So does that mean – dread words – this time it’s different? Here on The Value Perspective, we do not believe so because we do not believe humans beings have stopped being human.

What it really means, then, is investors are now facing an interesting opportunity – if only they are prepared to stand apart from the crowd. So how many of the largest income funds in the UK market are doing just that? Well, as the next chart shows, 11 are firmly in the growth camp, one is gently value-oriented and one is seriously value-oriented. Can you guess who runs it?


Source: Schroders, Morningstar Direct, based on Morningstar Income Category using fund data available at 31 May 2016


Now, to be clear, the right-hand side of the above chart contains some wonderful fund managers boasting some great long-term outperformance. These funds are, however, very differently positioned to the limited number of truly value-oriented options still available to investors these days – and they do now constitute a strong bet against history repeating itself over time.

Again, to be clear, that is not to say the performance of these 11 funds and all the others on their side of the chart will perform poorly in the future. But what it does say – and this is arguably a much more important point – is that anyone looking to diversify their investments by picking two large income funds, as many people do, now stands a high chance of picking two very similar portfolios.

These very growth-oriented portfolios may not all own the same stocks but the stocks they do own will have similar characteristics – and so you will not obtain genuine diversification by owning two, three or, should you feel so inclined, all 11 of them. Yet why, when investors are always thinking about their geographical exposure, do they so rarely – at least in the UK – consider to what degree they are overweight value or growth?

Here on The Value Perspective, we would argue there is a significant risk in not knowing where you stand on that question. Yes, an overweight towards growth may well have worked out very well over the last 10 years - but over the next 10? While nobody knows for certain what the future may bring, more than 100 years of investing would suggest otherwise.


Nick Kirrage

Nick Kirrage

Fund Manager, Equity Value

I joined Schroders in 2001, initially working as part of the Pan European research team providing insight and analysis on a broad range of sectors from Transport and Aerospace to Mining and Chemicals. In 2006, Kevin Murphy and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Kevin and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

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The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.

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