Growth shares have pummelled value stocks in the past few years.
You just need to look at the successful technology stocks in Australia and overseas as evidence of this:
- Even after the pull-back this month, Afterpay Ltd (ASX: APT) has risen 740% since March
- Xero Limited (ASX: XRO) has surged more than 640% in the past 5 years
- Appen Ltd (ASX: APX)'s price has multiplied 32 times in the past 5 years
- Tesla Inc (NASDAQ: TSLA) has gone ten-fold in just over a year
In the US, the Russell 3000 Growth index has outperformed the Russell 3000 Value index by more than 7 percentage points per annum over the past 10 years.
This has had analysts wondering whether value investing is still relevant.
Bank of America sent out a provocative note last month declaring that value investing is "dead" after a decade of woe.
As opposed to growth shares, value investing involves picking out more established companies that are undervalued by the market.
It's what Warren Buffett espouses, so the strategy has served many investors very well over the decades.
But their loyalty is being sorely tested.
Betashares senior investment specialist Cameron Gleeson told The Motley Fool that the low-interest environment in recent years had propelled growth stocks.
"Falling rates increase the present value of future cash flows, and this typically will have an especially positive impact for companies with strongly growing earnings," he said.
"With the benefit of hindsight it's perhaps not surprising that we have seen growth outperform value for over 10 years now."
It's not dead, it's just resting its eyes
But Gleeson believes the value investing concept is not "dead".
"If the global economy shifts to a reflationary environment it is broadly expected that value will outperform and growth will lag."
While everyone's pretty used to low interest rates, it's not that absurd to think inflation may return suddenly in the coming years.
"Expectations of increasing inflation and re-opening of economies may be triggered by the announcement of an effective COVID-19 vaccine, for example," said Gleeson.
He added that value stocks are actually relatively cheap at the moment after many years of underperformance.
"For this reason, holding some exposure to value in your portfolio blended together with growth can improve the stability of your overall portfolio."
Despite signing off on the funeral, Bank of America suggested four ways value investors can improve results:
- Target small caps
- Focus on quality, not "value traps" or fading industries
- Monitor macro-economic conditions (eg COVID-19 lockdowns, vaccines)
- Take "intangibles" into account when valuing a business (eg intellectual property)
"Equities markets such as the UK's FTSE 100 Index (INDEXFTSE: UKX) offer exposure to large global value and cyclical stocks, like HSBC, Unilever and Royal Dutch Shell at compelling price levels and with an attractive yield," said Gleeson.
