Lonsec   ⟩   News & Insights   ⟩   News   ⟩   Value investing has taken a hit in 2018
Gordon Toy

AuthorGordon Toy

DateJune 20, 2018

CategoryNews

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Australian fund managers with a value focused investment strategy are struggling to keep up with the index as the market continues its shift in favour of growth stocks.

While value shares have outperformed growth over the past ten years, growth shares have been in front for the past five, despite a value comeback in 2016 and the early part of 2017. Recent performance shows that growth has extended its lead even further, while the average return for value managers is in negative territory so far in 2018 (see chart below).

Calendar year returns for Australian growth and value equity fund managers (% p.a.)

Source: Lonsec

Includes value and growth style Australian equity fund managers rated by Lonsec Research

Value investors look for well-run businesses with solid company fundamentals that may be undervalued due to industry headwinds or temporary negative events. In contrast, growth investors look for businesses with high growth potential or earnings momentum, which can include smaller, scalable businesses or established market leaders.

The behaviour of value and growth shares over different periods, and the tendency for one or the other to outperform, underlines the importance of diversification, not just across markets and sectors, but across investment styles as well. For example, despite the five-year trend, value has outperformed growth significantly over a twenty-year period.

Value versus growth shares (growth of $10,000 to May 2018)

Source: Lonsec, Bloomberg

Despite the relatively lacklustre performance of Australian shares in 2018, growth companies have remained in favour and are currently the main drivers of market returns, among them consumer staples shares like A2 Milk Co (A2M) and Treasury Wine Estates (TWE), as well as some big names like CSL (CSL), Australia’s leading biotechnology business.

Growth shares have dominated through the end of 2017 and the first half of 2018

Source: Lonsec, Bloomberg

Meanwhile, value shares (represented by the MSCI Australia Value Index) have been weighed down by recent poor performance from financials and telecommunication shares, including the major banks which have come under pressure from the Royal Commission into Financial Services. The banks may become attractive propositions from a value perspective, but the question is how long it will take before they regain favour from the broader market.

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IMPORTANT NOTICE: This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL 421 445 (Lonsec).

Please read the following before making any investment decision about any financial product mentioned in this document.

Warnings: Lonsec reserves the right to withdraw this document at any time and assumes no obligation to update this document after the date of publication. Past performance is not a reliable indicator of future performance. Any express or implied recommendation, rating, or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “general advice” (as defined in the Corporations Act (C’th)) and based solely on consideration of data or the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person.

Warnings and Disclosure in relation to particular products: If our general advice relates to the acquisition or possible acquisition or disposal or possible disposal of particular classes of assets or financial product(s), before making any decision the reader should obtain and consider more information, including the Investment Statement or Product Disclosure Statement and, where relevant, refer to Lonsec’s full research report for each financial product, including the disclosure notice. The reader must also consider whether it is personally appropriate in light of his or her financial circumstances or should seek further advice on its appropriateness. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, hold, redeem or sell any financial product(s), and the reader should seek independent financial advice before investing in any financial product. Lonsec may receive a fee from Fund Manager or Product Issuer (s) for reviewing and rating individual financial product(s), using comprehensive and objective criteria. Lonsec may also receive fees from the Fund Manager or Financial Product Issuer (s) for subscribing to investment research content and services provided by Lonsec.

Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by Lonsec. Conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the information.

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For more information contact:

Gordon Toy
03 9623 6373
Gordon.Toy@lonsec.com.au

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