Q What do you expect to happen to value stocks in 2020?
As we stand today, things have started to recover in terms of a number of companies we are invested in, via their share prices, their earnings outlooks, or both. We still see a lot of value in those sectors and regions where we are exposed in our portfolios and we see a lot more to come from the stocks that we hold within them in 2020 and beyond.
Q How did 2019 pan out for your portfolios?
If you start the clock at the start of 2019 and stop it right now, it looks like it has panned out fine but, within that period, there has been a lot of turmoil. We have seen some of our investments pay off and some of them not work out so well. We are generally still positioned, in terms of the Global Value portfolios, to benefit from those same themes, sectors and opportunities. However, during 2019 we did see an extreme aversion to value stocks in general, and some of the main sectors and regions we’re exposed to in particular.
Q Why do you think there is still extreme aversion to value?
Value feels like it has been on a rollercoaster ride lately. Sometimes you blink and you can miss it. In our strategies we made back a year’s worth of underperformance in the space of just a week in 2019. When these things turn, they can turn very, very quickly, particularly in some of the more economically sensitive sectors and regions and even more so specific companies. We have seen a couple of our portfolio holdings bounce by 60-70% in the space of just a couple of months on ‘not that exciting’ news. So, over the long term, we think our theses tend to play out but there can be volatility in the near-term, which can be off-putting to some investors.
Q Where do you think the opportunities and risks will be in 2020?
There will be risks in valuations, particularly in the US market. We, in our Global Value portfolios, are underweight the US although, because we have a concentrated portfolio, we are still able to find some attractive opportunities there as part of our 40-stock portfolio. We see more opportunities outside of the US in regions such as emerging markets, in the UK, particularly UK domestics, which have been beaten up over the past few years, and increasingly in Europe as well as in Japan, which has been screening very cheaply for value investors for some time.
In terms of companies’ share prices, we are exposed to short-term volatility and the overall economic environment, and we can’t deny that value as a style or factor tends to correlate pretty well with things like inflation, interest rates and economic growth over the cycle. However, over the long term, we think we have got a portfolio of stocks that can dig themselves out of their own holes irrespective of where those macro variables move in the short term.
Q How will this influence your portfolio positioning?
We are long-term investors who have more of a ‘super tanker’ approach to steering from one theme to another but we have positioned our portfolio to benefit from some of the areas of opportunity that we have described, so things like UK domestic stocks, particularly banks and builders merchants; emerging market stocks – we now have an overweight position in emerging markets in regions like South Korea, in Turkey, in the Middle East, and we have a couple of interesting Japanese stocks too. We are also underweight the US which, while we are bottom-up investors, is clearly an expensive market from a top-down perspective, hence we see fewer opportunities there than elsewhere and have positioned our portfolio accordingly.
What that gives is a portfolio of very cheap stocks based on our assessment of fair value. We see more than 50% upside on average across our portfolio, which is a figure that is higher than where it has been in the past. So our outlook for our portfolio is that it is very cheap without having had much of a value tailwind to benefit from during the past few years.
Q Are you still seeing pockets of value out there given the extended bull cycle?
We can’t deny that, if the whole market rerates to say 20 times earnings, then the value portion of that market might see some pressure in a bear market, but we are fundamentally absolute investors. We try to buy companies based on a 10% return on our original capital committed. So we would: (a) seek to outperform in a bear market; and (b) would look to perform respectably in absolute terms as well over our long-term holding periods in the companies in which we invest.
We are not immune to bear markets and we couldn’t say there would not be some short-term volatility and some short-term drawdown in such scenarios. However, we are fundamentally absolute investors and would shun those areas of the market that are most expensive, hence our underweight positions in sectors such as technology, consumer staples and healthcare.
All investments carry the risk of capital loss.