Spurned for years by investors intent on ploughing their funds into growth stocks, value-based investing is making a comeback.
Greg Smith, head of retail at Devon Fund, says growth stocks, which tend to do better when interest rates are low and expected to remain low, have had a good run since the GFC but this environment is changing as interest rates rise across the globe.
Not only are central banks lifting rates but bond yields in the US have risen one percentage point, from 1.6% to 2.7%, since the beginning of this year “and people are starting to focus on the fact that rates are going only one way – north”, Smith says.
Growth stocks flourished during the pandemic, but investors are now turning their attention to value stocks – those that trade at a significant discount to their intrinsic value. Another area where this can be seen is a move away from tech stocks, with the Nasdaq composite down 14% year-on-year.
Asked whether investors and advisers understand the rotation away from growth stocks, Smith says there is “a certain amount of need for a pivot”. Looking at recent performance figures, value stocks are definitely gaining favour. “You’re seeing old economy-stye stocks doing better.”
Devon Fund is firmly in the “value” camp, though Smith acknowledges growth stocks can be exciting. There is no question that value has underperformed over an extended period – specifically, during the three major crashes of the past 20 years. But now that they’re coming back into favour, Smiths says, if history is any guide, this cycle will endure.
Devon Fund, which has traditionally focused on the trans-Tasman market, is about to launch two international funds – a global equity fund and a bond fund. “Both will have a heavy sustainability tilt,” Smith says.
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