- UK value has underperformed over the past three months.
- Are small-cap value fund inflows a contrarian indicator?
- Are value fund managers’ insistences of more to come an admission the best is over?
- Is it time investors reviewed their exposure to the value-rotation theme.
- Loads of new idea-generating data.
How long can the much-vaunted “value rotation” continue? Come to that, has it already ended?
It’s a pressing question for UK investors. The domestic stock market has been a massive beneficiary of this powerful trend since vaccine breakthroughs were announced in November.
It is not only the setback in lifting lockdown restrictions in the UK that should give 'value' fans pause for thought. Value stocks appear to have been underperforming growth stocks for a while already.
As well as the data from our style chart, over the past three months, the MSCI UK Value index’s total return is 5.1 per cent compared with 9.7 per cent from UK Growth and 6.7 per cent from the broader MSCI UK index.
Another perturbing sign for those playing the value-rotation theme is that investors have been piling into UK small-cap funds and especially value-focused ones. Small-cap fund inflows in April hit £240m, the highest since the £279m record set in the wake of post-Brexit euphoria in December 2019.
High fund inflows are generally seen as a contrarian indicator. The popularity of small-caps is particularly significant for value because the outperformance of small-caps and value stocks tend to go hand-in-hand when the market anticipates economic recovery.
Another reason to be reflective about the 'value rotation' is the sheer volume of comment from value-focused fund managers professing there’s much more to come. Often the unspoken implication of such comments is that the best is already behind us.
To be fair, there are some good points that are being made in favour of further upside from value stocks and especially from the UK’s downtrodden market. The high levels of takeovers of UK-listed companies is encouraging, as is the relative cheapness of the UK’s stock market.
Many also still see a big valuation gap between value and growth stocks in general. Dutch fund manager Robeco, for example, points out that the difference in valuations between the most expensive quarter of global stocks and the cheapest quarter is still among the widest 3 per cent on record.
What’s more, as highlighted on a number of occasions by this column, there are grounds to hope the UK’s post-pandemic economic recovery will be a real stonker ('Time to Buy British?', 1 Oct 2020, 'The Trade of the Decade on Your Doorstep' 4 Mar 2021). But with the MSCI UK Small Cap Value index returning over 50 per cent since the start of November, a lot of the fun has already been had.
Still those riding the themes of UK value and small-caps, the recent moderation in performance gives a reason to assess whether any rebalancing away from these hot trends would be desirable. It may not be such a one-horse race from here.
