Value vs Growth – Which Strategy Should You Choose?

To make their case, the Morningstar manager research team studies Asian funds.

Kate Lin 26 July, 2022 | 15:20
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The multiyear gains of growth-oriented equity strategies met with a roadblock in 2021 as global investors rotated into value stocks. In particularly, tech stocks were severely punished as market players are skeptical that the sky-high valuation multiples of these stocks would continue to be sustainable as borrowing costs rise.

In Asia, a similar reversion happened, with MSCI AC Asia ex-Japan Value outperforming its growth peers for the first time since 2018. This year, although value investing could not escape a broad market downdraft, value stocks in Asia held up relatively well, losing 8% versus growth’s 16% slide.

Asia Growth Stocks (and Strategies) Loses Steam

“After having enjoyed an immense rally in 2020 that was fueled by both government stimulus and by being the beneficiaries of prolonged pandemic challenges in the region, growth stocks have hit a setback, thanks in part to regulatory crackdowns specific to growth industries—such as the tech and education sector clampdowns in China. This has caused the growth-oriented stocks to plummet,” says Germaine Share, director of manager research at Morningstar, describing the challenges specific to Asian growth companies.

Indeed, value stocks have been able to defend their merits in this round of the market correction. In this particular environment, energy and materials are benefiting from tailwinds caused by geopolitics. The stocks also tend to benefit from stronger net asset backing or book value, which provide an anchor from which to ride out market volatility, according to Share.

 

It’s Not Wise to Try to Capitalize on Different Styles

However, Share reminds investors that pouring all your investible capital into value funds is not a panacea. “Value stocks are not immune from the impact of rising interest rates, but they are likely to benefit in relative terms, as overall valuation dispersion in the market narrows.”

There are two keys in planning a long-term investment strategy. As always, investors would be wise to remember that diversification is the only free lunch in investing. So first, diversification by style would be a more ideal way to navigate the market. “Diversification by style continues to play an important role to help investors ride out periods of volatility, ensuring they have the fortitude to stay the course,” she adds. A portfolio made up of building blocks capable of moving in different directions can have better risk-adjusted returns than its component parts. Allocating to different asset classes can also minimize pain during market crashes

Second, while there is a general trend of value managers outperforming growth managers, Share thinks long-term credentials remain key when selecting funds.

In Asia, Active Funds Show Their Worth

“We are undoubtedly departing from the environment that had supported loose monetary policies and equity market growth of the past decade. However, it is pleasing to see that against such a challenging investment backdrop, certain investment styles and skilled stock-pickers are able to capitalize on the opportunities that market volatility presents,” she says.

For active fund managers, she trusts that choppy markets are an “opportunity to prove their worth”, especially following extended losses in market share to their passive peers. “We expect performance dispersion to continue, and we see this period as an excellent opportunity for good active managers to prove their worth against passive alternatives."

How Do Medalist Funds Fare?

Share and her team studied four Asian equity funds and their performances amid the stylistic change. All of them warrant a medalist rating, which means a Morningstar Analyst Rating of Bronze, Silver or Gold. The ratings express the analysts’ conviction in each strategy’s ability to deliver superior risk-adjusted returns over the full market cycle.

The Bronze-rated JPMorgan Asia Equity Dividend has held up relatively well year to date, thanks to its income focus. It targets an overall portfolio yield that is 130% of the MSCI AC Asia Pacific ex Japan Index, which it has consistently met, and it seeks a balance between yield and capital appreciation. In line with the strategy's dividend focus, the portfolio had an overweighting in financials and underweighting in growth-oriented sectors such as healthcare and consumer discretionary, which contributed to the strategy's relative performance so far this year. Specifically, some of the top contributors over this period were high dividend-paying names such as PICC Property and Casualty or China Overseas Land & Investment. At the same time, a "quality-at-a-reasonable-yield" bucket was introduced to the investment process in 2020, which should allow the strategy to participate more in growth markets going forward.

The Silver-rated Schroder ISF Emerging Asia is a prime illustration of how the strength of the portfolio manager and strong stock-picking skills can help withstand stylistic headwinds. Lead manager Louisa Lo has consistently applied the strategy's long-term-focused quality growth investment approach for almost two decades. Lo favored structural growth trends such as electric vehicles and solar energy, and her stock pick in JinkoSolar, a leading solar panel manufacturer, rose amid a falling market. In addition, Lo found select opportunities up the supply chain within the materials sector, such as miners and separator producers. Certain gold miners were also held as a hedge against market volatility. Elsewhere, the positions in BOC Hong Kong, Standard Chartered, and HSBC, which Lo bought over 2020 and 2021, helped relative performance amid the rising rate environment.

The Silver-rated Fidelity Sustainable Asia is managed by Dhananjay Phadnis using a quality growth investment approach with a sustainability mandate, where he focuses on companies run by strong management teams and that can demonstrate reliable value creation. While the manager has had much success with his stock picks over the years, the strategy is not immune to stylistic headwinds in recent quarters as value stocks raged on. Notably, Phadnis' emphasis on sustainability issues has led to a underweighting in the energy and materials sector, both of which weighed on relative performance this year to date, and the only energy holding in the portfolio, China Suntien Green Energy, a major natural gas and wind power company, figured among the top laggards over this period. Despite the middling performance so far this year, Phadnis is a proven outperformer with a superior long-term risk-adjusted track record.

The Bronze-rated JPM Asia Growth's more salient growth orientation has led to its underperformance this year to date, and the portfolio's overweighting in the IT and consumer discretionary sectors proved to be inopportune over this period. A number of Taiwanese tech holdings, such as chipmakers Parade Technologies and Silergy, were sold off by the market due to concerns around potential adjustments in the tech cycle. The investment in Sea Ltd. has also been painful, as the stock derated significantly in recent quarters after the company started showing signs of slowing growth. While the strategy's performance this year to date has been disappointing, we remain confident in comanagers Mark Davids and Joanna Kwok, together with JPM's vast analytical resources and a robust investment process.

Germaine Share and Samuel Lo contribute to the fund research in this article.

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About Author

Kate Lin

Kate Lin  is a Data Journalist for Morningstar Asia, and is based in Hong Kong

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