View from the Garden – June 2020

David Keir and Graham Campbell share their musings on the tentative signs of recovery in ‘value’…

Normally we spend a lot of time in May and June hitting the road and meeting investors face to face.  We always find it insightful to hear how our clients view life and markets and normally share these perspectives in our “View from the Road” blog.  With most clients currently working from home due to the impact of Covid-19, we thought we would do a special “View from the Garden” blog focusing on the tentative signs of a recovery in “Value”.

We briefly provide our latest thinking on why investors should consider increasing their allocations to “value” and more specifically to the TB Saracen Global Income and Growth fund.

Value is a winning strategy

Our starting point is that buying good businesses at attractive prices and not overpaying for illusory growth appears a sensible approach.  As the chart below highlights, it has worked well for over 100 years. However, it has not delivered over the past 10 years now and many investors have given up on the strategy.

Source:  Kennedy Centre for Research

Value performance headwind

The sustained outperformance of, in our view, fully valued quality and growth stocks (which is highlighted in the chart below) has gone on for much longer than we expected.  While we have some sympathy that investors will value defensive and growth attributes when economic growth is declining, the divergence is nevertheless extraordinary.  What we have found surprising is that value stocks, until recently, have continued to underperform during the market collapse, despite having materially underperformed in recent years.  There would appear to be no market conditions where value outperforms!

Value managers are losing assets, mandates and their jobs.  The consensus view is that the increasing importance of ESG will only exacerbate this trend.  Over time, and because of the long-term continued outperformance of growth and investor style drift, there are now very few truly value-orientated portfolios in the global segment.

Valuation must surely matter

The other notable feature of equity markets has been the absence of any discussion on valuation when assessing many businesses that are covered in the Quality or Growth segments.  It seems a strange approach to ignore the price you pay, when considering an investment.  Similarly, if there is an attractive price to buy a share, there must also surely be a price when it is overvalued and should be sold.  It seems like the industry has forgotten, or more likely, conveniently ignored any Sell Process to allow managers to retain shares, when they intuitively know they are expensive: but there is safety in numbers!

Growth versus value outperformance reached a record on 15 May 2020 – was this the peak?

The current underperformance of value is now so extreme that on the 15 May, growth’s outperformance of value hit an all-time high (see the chart below).  We believe that this disparity is now simply too big for investors to ignore and note the significant improvement in value performance since then.

Catalyst for value to outperform

So, value is cheap and under-owned and has never traded at such a big discount to quality and growth.  The debate is about a catalyst for this trend to reverse!

The sharp and severe recession caused by the impact of Covid-19 may provide the stimulus for a long-awaited change in market leadership.  Value usually outperforms post recessions.

A combination of the steepest recession on record with unprecedented monetary and fiscal support should help the recovery and increase investors willingness to rotate into value stocks.

Bear markets end with recessions, they do not begin with them!

In addition, many investors own the same, expensive shares, which are proving in many cases to be no less cyclical than other lowly rated sectors.

TB Saracen Global Income and Growth Fund

The whole ethos of the fund is to buy global leading businesses that have the potential to grow over the long-term but be disciplined in the price that we pay and when to sell.  Our “pragmatic” value style has clearly been out of favour (particularly over the last couple of years) given the markets disregard for valuation metrics.  However, our process has not changed and the given the lack of middle ground, the fund has never had a greater value bias.   As the Morningstar style chart in the table below highlights, there has been no style drift here!  SGIG only invest in companies that we consider as undervalued.

The fund remains very differentiated in the global equity income peer group and attractively valued both against the peer group and the market – currently trading on 14X 2021 eps and yielding over 4%.

We believe we have significantly improved the quality and long-term growth prospects of the Fund through our portfolio upgrade in March – when we were able to invest in high quality businesses such as American Express, Danone, Fuchs Petrolub, Prudential and Rockwell at very attractive valuations.  We did a portfolio upgrade of similar magnitude in Q1 2016 which aided performance significantly.  We strongly believe that several of our holdings are materially undervalued.


The global economy will recover.  There is no reason to believe this time will be different. The combination of the steepest recession on record with unprecedented monetary and fiscal support should boost economic activity.   This is usually a positive scenario for ‘Value’ investors!

Value has begun to perform in recent weeks.  We firmly believe that this is the (long-overdue) beginning of a more sustainable trend, as earnings and valuations once again take centre stage.

There are still many outstanding opportunities in high quality businesses that are trading at attractive prices.  Investors may not yet be convinced that the trend has turned, and ‘value’ is back, but more appear to be considering the possibility and are interested in blending their portfolios to capture some of the potential recovery.

We believe that the TB Saracen Global Income and Growth Fund with its attractively valued portfolio of global leading businesses is well positioned to recover lost ground should investors refocus on valuation and market leadership changes.

Stay safe and many thanks for your patience and continued support.

David Keir (

Graham Campbell (

Co-Managers, TB Saracen Global Income & Growth Fund

June 2020


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