BAILLIE GIFORD

GROWTH STILL WINNING

James Budden, Director of Marketing and Distribution at Baillie Gifford gives us his take on the value versus growth debate

The return of value investing was

announced enthusiastically last year by its many fans. However, by the end of 2019, its arrival was exposed as little more than fake news, a view strengthened by the current climate.

Although value indices have lagged growth equivalents since the 2008 financial crisis, investors who favour that approach cling to hope that the cycle will change and the mean will revert. Of course, history provides many lessons, but it does not tend to repeat itself. So, it is perhaps just easier to look at the past rather than trying to predict the future.

During the last decade, traditional value areas of the stock market such as retail, financials, industrials, pharma and energy have been turned upside down by technology-driven entrants. Disruption has become mainstream and the corporate transformation may be even more dramatic than we realise. Value stocks are very cheap, largely for very good reasons. Business models are broken, and long-term investment has been replaced by short-term share price therapy. At some stage, growth may falter and pause for breath but may not mean that value regenerates. The gap will close because both get cheaper as markets correct. Growth will move on again and value will remain cheap. Again, this trend appears to be accelerating during the coronavirus crisis.

In truth, we may be better off dispensing with the idea of value versus growth and stop concerning ourselves with the cycles that are supposed to see their respective dominance leapfrog each other. Perhaps it is more a case of new economy versus old economy. What history does tell us is that markets are driven by a small group of very big winners and that a lot of companies simply don’t contribute much, if at all, to overall wealth creation.

So where does that leave value investing, with its classic margin of safety and its reliance on price-to-earnings ratios? The big winners so far this century have been major internet platforms in the US and China. Their exponential growth continues and their returns show no signs of diminishing as they get bigger.

The labels of growth and value give comfort to those trying to define market movements and bring some certainty to the uncertainty and unpredictability of investing. Some fund managers will have the skill or the luck to spot a bargain and so create value for their investors. Others spend their time trying to find the big winners. This approach is asymmetric. Failure can cost up to 100 per cent, but value added can be many times that. These are the true growth managers and news of their demise is certainly premature, if not fake. n

FOR FINANCIAL ADVISERS ONLY, NOT RETAIL INVESTORS. AS WITH ANY INVESTMENT, YOUR CLIENTS’ CAPITAL IS AT RISK.

This article does not constitute, and is not subject to the protections afforded to, independent research. Baillie Gifford and its staff may have dealt in the investments concerned. The views expressed are those of James Budden, are not statements of fact, and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority (FCA). The trust is listed on the London Stock Exchange and is not authorised or regulated by the Financial Conduct Authority.

Perhaps it is more a case of new economy versus old economy.