Two big diversification lessons to take from 2020
If they want at least part of their portfolio to ‘zig’ when the rest of their investments ‘zag’, even value’s greatest sceptics should now consider taking on some exposure to the style
Last year proved such an assault on so many aspects of all our lives that commentators quickly ran out of original ways to describe it. ‘Unprecedented’ emerged as the cliché of choice but, from an investment perspective, one of the most notable episodes of the year was precisely that – the ultimately short-lived downturn in global stockmarkets proving both the fastest decline and fastest rally in all of financial history.
For those investors with the resources to move quickly enough, the market falls offered some very attractive buying opportunities. More particularly, here on The Value Perspective, we saw it as a great chance to diversify risk across our portfolios – and especially globally. The following table offers a high-level breakdown of how our global portfolio evolved between 30 November 2019 and the end of 2020.
As you can see, we increased the overall number of stocks in the portfolio, upped the weightings in cheap countries, such as Japan, and diversified concentrations in cheap but risky sectors, such as banking. To be clear, these were not explicit moves but a consequence of our bottom-up, stock-driven investment choices – if the market offers us better upsides in more stocks with greater risk reduction, we will happily take that.
The bigger picture
Diversification is not just a key consideration for our own portfolios but for client portfolios as a whole. Here on The Value Perspective, we prefer to steer clear of short-term performance charts as they tend to offer a distorted picture but sometimes they tell a story – and the following chart clearly illustrates how extreme the dislocation between growth and value in global markets has been and how quickly it can snap back.
As you can see, last November, our global portfolio – and value in general – massively outperformed the market as a whole and growth in particular. There is, rest assured, no hint of triumphalism in that observation – despite this one great month, 2020 was a dreadful year for value. Our own global fund ended the year some 20% behind its benchmark and, as we have noted before, longer-term returns for value have been horrendous.
Nevertheless, an objective assessment of the evidence indicates moments of market weakness can present an attractive entry point. And simply put – whether you believe investing in cheap stocks is the mean-reversion play of the century or a fool’s errand peddled by someone who simply does not understand the world has changed – almost everyone can appreciate the cold hard logic of not putting all your eggs in one basket.
Different label, similar profile
These days, investment styles such as growth, quality and momentum – even thematics and ESG – often boil down to different labels for funds that typically move the same way and offer a similar profile of returns. That being so, value does not have to be the biggest or highest-conviction call in your portfolio – it just has to be the investment that will ‘zig’ when the rest of your portfolio ‘zags’ – as happened for so many last November.
That type of sharp correction or sudden shift in market sentiment is not something investors should dismiss as a flash in the pan – especially given the sort of bullish behaviour that has bubbled up of late around stocks such as GameStop. If you look at the value rallies of recent years – in 2016, 2018 and at the end of last year – each one has been more significant and more violent than the last.
Every bubbly episode – especially those in which private investors decide to become involved – is amplifying risk. That suggests the next value rally could be even quicker than the last – meaning those who reckon they will be able to jump in ‘as it starts to happen’ may find they are too late. Timing such moves is incredibly hard, which is why value is now the insurance policy not even its greatest doubters can afford to be without.
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.
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.
They do not necessarily represent views expressed or reflected in other Schroders' communications, strategies or funds. The Team has expressed its own views and opinions on this website and these may change.
This article is intended to be for information purposes only and it is not intended as promotional material in any respect. Reliance should not be placed on the views and information on the website when taking individual investment and/or strategic decisions. Nothing in this article should be construed as advice. The sectors/securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy/sell.
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.