Interactive Investor

Why value shares can keep outperforming growth shares

9th February 2023 10:51

by Sam Benstead from interactive investor

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Roberta Barr, manager of the Schroder Global Sustainable Value Equity fund, speaks to interactive investor deputy collectives editor Sam Benstead about how the strategy is managed. A value fund with a sustainable investment mandate, she explains why picking cheap shares is a far better investment strategy than buying expensive but faster-growing shares. Barr also reveals which shares she is excited about for 2023, and why focusing too much on macroeconomic factors, such as interest rates, is unhelpful for investors.

Sam Benstead, deputy collectives editor, interactive investor: Hello and welcome to the latest Insider Interview. Our guest today is Roberta Barr, manager of the Schroder Global Sustainable Value Equity fund. Roberta, thank you very much for coming into the studio.

Roberta Barr, manager of Schroder Global Sustainable Value Equity:My pleasure, thank you for having me, Sam.

Sam Benstead: You run a value fund, you're looking for cheap, unloved shares. Why is that the right way of picking stocks? Why should we choose cheap shares rather than expensive, faster-growing ones or even just own the entire market?

Roberta Barr: So there's a really fun statistic out there, which I think might be interesting for you, for this question. Imagine that you were back in 1926 and your grandparents are given $10,000 to invest for you today and let's say that your grandparents are really exciting, innovative kind of people. And they think into the future and they think, oh gosh, all these exciting developments are under way. Remember at that point there wasn't the internet, cars were barely a thing, flights [and] international travel wasn't really a thing, there's a long way to go. So, let's say that your exciting grandparents put that $10,000 into growth companies. They wanted to invest into that future for you.

Well, then today you would be given just over $100 million. So, a great return and certainly not one that I think many of us would say no to. But let's instead say that your grandparents were boring, pragmatic people. They didn't want to invest in things that people were getting overexcited about and they didn't really know would work. Instead, they're going to put that $10,000 into value companies.

Well, then today you’d be given just under $1 billion. So, an amazing return and I think what it really highlights to us is that over the long term, value works and it works spectacularly well. Even if we just look at each decade going back again to 1926, then the last 10 years is the only 10 years where value has not outperformed growth. In absolute terms, it has still had a positive return, it hasn't you lost money.

I still have a job, but it hasn't done as well as growth, and I think we're all human, we're all subject to behavioural biases such as recency bias. I think it's so important that we don't overweight the statistical significance of these past 10 years, where value has had quite a tough time, and instead remember that the vast majority of history does lie in value's favour. So, hopefully if you're patient and you wait it out, then you should appreciate those full returns that you can give.

Sam Benstead: And why hasn't value done so well over the past decade? You've underperformed your peers as these giant tech stocks have become more and more expensive, but they've gobbled up a lot of the market and increased profits as well. So why hasn't value outperformed and why is value still the right way of investing?

Roberta Barr: So, as you say, there are many reasons why value hasn't outperformed and it's certainly been a really tough few years for value, which is not what we want for our investors. But I think just to make one point, is that in absolute terms, we have still delivered quite a healthy return, it just hasn't been this amazing return that the growth stocks have had. And I think as well that, the reason you should still be in value is because when markets turn, they turn so fast and so unpredictably. If you just look at a few points back in 2022 when value snapped back, it really hurt some people who just weren't able to move their portfolios fast enough. And if you look at the charts of value versus growth in the long term and where value sits versus growth today, then if you think those small snap-backs hurt, then there's still a significant way to go to meet the mean levels of value versus growth. So, if that hurt, imagine how much this is going to hurt.

Sam Benstead: The fund is flat over the past 12 months. That's better than your global investment peers, but still not a positive return. Would you have expected more given the changes in market conditions, or are you happy with that performance?

Roberta Barr: The portfolio is flat over, say, a year versus the benchmark, that's OK. That's pretty good. But you're absolutely right, we would want to be outperforming in absolute terms and giving a significant return in absolute terms. But if I look at how our sustainable value portfolio performed versus, say, our global recovery portfolio, then our global recovery portfolio had a very good year last year, outperformed in both relative and absolute terms.

And if I look at the differential between sustainable value and our global recovery fund, the whole difference comes from oil and gas, and that's exactly what you'd expect as a sustainable fund. You can't hold oil and gas, so actually you will always suffer from when there are oil price rallies, but also in the future, say, if there are carbon taxes or windfall taxes, you won't suffer that hit either. So, I think what we say for what we roughly expect this fund to do is, we expect it to perform well when value markets perform well, with the caveat that we're not holding sin business activities and that can hurt or benefit in the shorter term.

But it's leading on to a point which I often get asked as a sustainable value investor, which is, you don't hold these sin sectors. Those are some of the most attractively valued sectors out there today. Does that mean that you're going to miss out on their attractive valuations, so you're not going to be able to outperform?

And you know what? They're right. Because as we all know, as soon as you start to reduce your opportunity set, you are reducing your potential for outperformance. But I think it's so important not to over-exaggerate that fact. So, if we look at a proxy value portfolio going back 30 years or so, you'd expect that value portfolio, roughly outperforms its index by around 5.2% per annum. If you take that same proxy value portfolio and you apply a whole host of exclusions. So, you remove all of tobacco, all of gambling, all of alcohol, all of oil and gas, utilities and so on, you're probably harsher than you'd actually find in a sustainable fund. That portfolio outperforms by 5.0%, although not the 5.2% of the unconstrained fund, but still a very healthy and not significantly different excess out return.

Sam Benstead: And what are the main differences between your portfolio and the Global Recovery portfolio? Where are the exciting, sustainable value stocks that make your fund a bit different, a bit special?

Roberta Barr: On the valuation side it’s exactly the same. On the sector side, we don't hold oil and gas. We also don't hold the auto companies that they do in the Global Recovery fund. But we make up for that in telecoms, were we can see some really great opportunities for ESG-leading companies, which are also very attractively valued. And we also hold a bit more in things like healthcare. On the regional side as well it's probably also worth mentioning that the Global Recovery Fund holds some emerging market stocks, which we don't hold in our Global Sustainable Value fund for ESG reasons, but instead we've made up that ground on, for example, Europe. Where we do find that nice combination of ESG leaders, plus attractively valued companies.

Sam Benstead: Have there been any new additions to the portfolio over the past couple of years or so, which you think will have a great short-term performance over the next few years?

Roberta Barr: So the portfolio has only been running for a year. So, all positions are technically new positions, but I guess in the past few months with market movements, we've certainly found a few new companies coming into our valuation screens, which weren't there before, and which make quite exciting additions to the portfolio. So, for example, in recent months we've added Verizon Communications Inc (NYSE:VZ), which I think is a really exciting company. I can't say about performance in the next one year, we're three to five-year investors, but I certainly know that it's a very nice US telecoms company that has made a very nice addition to the portfolio.

Sam Benstead: You've spoken about a bench of companies that you're watching, that you're ready to invest in if they hit the appropriate valuation. How many stocks are in that kind of back-up list? And where are the sectors that you are excited about but haven't quite seen the valuations yet?

Roberta Barr: So, we have this bench of stocks and it's the companies that we think could be interesting and they're maybe not quite at the right valuation yet, but we're certainly keeping an eye on them. And that bench is probably a bit longer at the moment than it typically is. And I think that comes from a lot of the market movements like in the US with a lot of tech stocks falling. What I'd say is that a lot of the FAANG stocks aren't necessarily appropriate for a sustainable fund, but there are still some very attractive on the edge companies which we're keeping a close eye on, so watch this space. But I think it's always makes it interesting as a value investor that there's no company which is immune to finding its way into our valuation screen. There's no company which is so untouchable that in the long term is going to never fall out of favour in the market. I think that's what makes it really exciting as a value investor, who knows what's coming and you'll probably see everything throughout your career.

Sam Benstead: You have a lot of technology in the portfolio. Companies like eBay Inc (NASDAQ:EBAY), International Business Machines Corp (NYSE:IBM), Intel Corp (NASDAQ:INTC), these are what some might consider tech stocks that are past their best. They've had their heyday. So why do you still like them? Why are their best days ahead of them?

Roberta Barr: Well, they have had their day, but that's not to say they aren't going to have another good time. So, if we look at them firstly, they're often winding down, perhaps a legacy part of the business, but they've also got a lot of cash to start investing in new, exciting areas. And so where we see the balance of a company where you're paying basically nothing for the existing part of the business and you're getting this free option for what they could and should be able to produce, then I think that's exactly the sort of company that we want, where we know that the cash it's going to kick out makes it fine as a company, good as an investment. But you have this asymmetric potential return to the investment risk that you're taking on.

Sam Benstead: And finally, the question we ask all our guests, do you personally invest in the fund?

Roberta Barr: Of course, I do fully invest in the fund and I must say it's very nice as a value investor to finally have a fund where I can put my money into that value style without having to compromise on my personal ethics of not wanting to hold, say, tobacco or a company which isn't doing everything that it can to remove human rights violations from its supply chain. So, for me, it was really nice to finally have this portfolio there and able to invest in.

Sam Benstead: Roberta, thanks very much for coming into the studio.

Roberta Barr: Thank you for having me.

Sam Benstead: And that's all we've got time for today. You can check out more Insider Interviews on our YouTube channel where you can like, comment, and subscribe. See you next time.

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