Value stocks in Australia have underperformed by roughly 50 per cent against growth during the last 10 years, but there was a reversal of the trend in the December quarter, with value stocks such as banks and energy companies coming out on top.
Fund managers have argued on either side on whether value has had a flash of good luck or if it is part of a greater sustained turn.
Scott Berg, a portfolio manager for the T. Rowe Price Global Equity Fund believes the rally will not last for much longer. He has begun to shape his holdings in response, pivoting away from value stocks such as financials, towards tech stocks in growth.
“My best estimate is that we’re probably 75 to 80 per cent of the way through the value rally, so I am now actively trimming a bunch of the value we inserted into the portfolio six to nine months ago,” Mr Berg told attendees at the T. Rowe Price Investment Forum.
“So the Wells Fargo [stock] that we were adding more and more and more as it went from 30 to 25 to 20, it’s now 40. It’s up 100 per cent.
“And the Zoom video… is down nearly 50 per cent from the peak. And so let’s take now some of that out and move in.”
He noted there are a number of dynamics that will feed into markets and sentiment, including policy from the Fed, the recent stimulus in the US and inflation.
“I do think the biggest gains have happened for the value thing. We were there early when I was buying financials,” Mr Berg said.
“Nine months ago, we got a lot of pushback from clients, ‘why are you adding financials right now?’ Now, it’s like ‘why don’t you add more financials? Why are you selling any financials?’
“You want to do these things when people don’t like them and right now, what excites me about a number of these growth stocks it’s actually contrarian to buy Zoom video right now.”
Equities, like other asset classes, are also expected to give lower returns than previously expected in the coming years.
“My view of the overall outlook for equity markets is global equities probably earn you five to 7 per cent as an asset class, just for a passive return,” Mr Berg said.
“But it’s not double digit return… Those low rates of bonds impact the returns for every asset class. And so I think equities are better than alternatives, but not nearly as good as what everyone’s been used to for a long, long time.
“If I do eight to 10 per cent for the next five years, I think that would be fantastic right, but it’s going to be half of what we’ve done for the last 10 years.”
