View from the Road – October 2018

Graham Campbell and David Keir, Co-Managers of TB Saracen Global Income & Growth Fund, discuss how clients may now be seeking to increase their exposure to ‘value’ style funds…

View from the road – October 2018

It was with slight trepidation that we started our regular round of client meetings.  We were brought up on the mantra that in times of good performance, it is important to communicate with your clients and in times of poor performance it is vital to communicate with them.  The recent few months have been difficult as investors have continued to favour growth as a style over value.  However, feedback has been surprisingly positive, and we sense that investors are now looking at increasing their exposure to “value” styled funds.

Value

Value as a strategy has been out of favour over the last 10 years.  However, we believe that over the long-term investing in “value” stocks should lead to outperformance.

As the chart below highlights, Value has outperformed Growth in roughly 3 out of 5 years since 1926, with an average annual price return of 18.9% for Value stocks vs 15.6% for Growth stocks.

Value vs Growth since 1926

Source: BofA Merrill Lynch, Ibbotson, Fama French

The outperformance of Growth against value since 2009 despite economic expansion is similar to the 1930s (after the great depression) and is an historic anomaly.

We suspect, that the current significant divergence in valuations of both value and growth stocks is causing investors to look at their portfolios and start to seriously consider tilting towards value.  As the chart below highlights, the underperformance of value versus growth has now reached two-standard deviations, which is a 5% probability event.

Value vs Growth since 1976

Source: Bloomberg

We have written a lot recently about how our portfolio has never been more “value” biased.  But from our conversations “value” can mean different things to different market participants.  Our definition of “value” is buying global leading businesses on a low 5-year Price Earnings ratio.

We have been staggered by the de-rating of many shares this year – both stocks that we own and ones on our watchlist.  This has provided opportunities to both top up our existing holdings which have performed poorly where we have strong conviction like DowDuPont, HSBC and Saint Gobain and introduce new names into the portfolio such as Carnival Corp, Interpublic Group, Michelin and Valeo.

The chart below, highlights how the P/E and yield have changed over the last 5 years of our recent purchase of Michelin.  The shares have de-rated to less than 9x 2018 PER and yield more that 4%.  We find that incredible value given that tyres are rarely a purchase that can be deferred, and replacement tyres represent 75% of the market.

Michelin

Source: Bloomberg

The outperformance of both the US market and growth stocks over the last few months had proven to be a difficult backdrop for fund performance.  However, the portfolio characteristics in the table below, highlight the value bias of the portfolio today which we believe represent a very attractive investment proposition for both existing and potential investors.

TB SGIG Characteristics vs FTSE All World

  TB SGIG FTSE All World
Current PE 14.3 16.9
1Y FWD PE 11.6 14.0
Current Dividend Yield 4.1% 2.5%
1Y FWD Dividend Yield 4.4% 2.8%
Beta 0.9 1.0
 Source: Bloomberg (23 October 2018)

 

Please contact us if you would like any further information.

Many thanks for your patience and continued support.

David Keir (david@saracenfundmanagers.com)

Graham Campbell (graham@saracenfundmanagers.com)

Co-Managers, TB Saracen Global Income & Growth Fund

 

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