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MAY. 14, 2021

And the Rotation Continues

The past 6 months have been characterized by a strong rotation out of the Growth factor and into the Value factor. The graph on the top left shows the total return of 5 growth funds and 5 value funds from our monitored list. The five growth funds (Gr 1 to 5) had, to various degrees, a stellar performance last year, but are all struggling to deliver results on a Year-to-Date basis. On the other hand, the value funds (Vl 1 to 5) have been challenged a lot last year, and are now all up between 10% and 20% during the first four months of 2021. While April seemed to be a reversal of this trend, the first two weeks of May have been characterized by yet another strong performance of Value versus Growth: on a month-to-date basis, the average performance of our monitored Growth funds is -6% while the average performance of the Value funds is +2%.

The factors that have contributed to this rotation are various. On the one hand, traditional value sectors such as Retail, Energy, and Industrials have been the clear beneficiaries of the reopening play and have rallied over the last six months. Interest rates are another factor playing a strong effect on the Value outperformance: the recent increase in long-term interest rates is benefitting Banks and Financials, as well as other traditional Value industries, with a positive effect on their profitability. At the same time, higher interest rates mean higher discount rates for Growth companies and higher costs to finance the growth.

If we look at the historical data (chart on the bottom left), we see how, over the long term, the Growth factor has substantially outperformed the Value factor. Looking at the monthly returns of the Russell 1000 Growth and the Russell 1000 Value indices, since 1978 the Growth Index has outperformed on 55% of the months. The recent underperformance of February and March, historically has happened in less than 2% of the months.

During the recent rotation, many high quality funds that we monitor and invest in, have been underperforming, because of their Growth factor exposure. While the weaker performance has definitely been frustrating, we were pleased as we saw no style drift. Managers’ styles and factor biases are analyzed during the Investment Due Diligence stage and when we invest with a manager we are conscious of the factors we are investing in and we take an active decision in that sense. What we do not want to see is a traditional Growth manager who starts investing in Value sectors, following a trend, without the experience and the knowledge to evaluate Value stocks. On the contrary, many of our managers have highlighted how the recent rotation has created the perfect entry point for many stocks whose prices have corrected. Overall, we feel confident about the longer term prospects for these managers and for the Growth factor more in general.

We thank you for the continued support.

Alessia Favotto