The past decade has been a boon period for equities, but it appears that cycle may be nearing its end. All bull markets have a shelf life, and with a number of headwinds currently facing the global economy, value investing becomes a more attractive proposition.
That’s the view of James Harper, portfolio manager and research analyst with Franklin Templeton Investments. As lead Portfolio Manager for Templeton Growth Fund, Ltd., Mr. Harper believes the developing investment climate will likely favour a value-orientated approach.
“Value as a style has underperformed growth for the last ten years since the global financial crisis,” he says. “Investors are much more risk adverse, and in a low growth environment, have been looking to pay up for growth. If we believe that economies will continue to move forward and recover, and the interest rate cycle moves ahead with modest inflation, historically that has tended to be a time when value does better.”
Equities’ unprecedented growth since 2008 has been fueled primarily by the US market, but that performance hasn’t been replicated across all regions. As Mr. Harper outlines, this disparity must be taken into consideration when adopting a value strategy in your portfolio.
“If you look at equities as a whole, you will see they are trading slightly below long-term averages on a Price-to-Earnings basis and a Price-to-Book basis, particularly if you look at Europe and Asia. There’s value to be found in those parts of the market.”
Then there is sector allocation to take into account, and for the Templeton Global Equity Group, currently that means going overweight in financials, healthcare, energy and telecoms, while turning away from technology, consumer discretionary and consumer staples. It is an approach that meant missing out on some spectacular returns in the tech space over the past year, but in Mr. Harper’s view, the fundamentals simply don’t support the valuations in many cases.
“Technology did feel like a safe haven for investors,” he says, “until the recent sell-off when investors reacted strongly to disappointing results in the sector. It feels like these mega-cap technology names that are trading at very high multiples have a lot of valuation risk in their current share price. These conditions are another reminder of the importance of diversification.”
As an active manager, it’s James Harper’s role to find the companies that present the best value, which is often easier said than done. There are plenty of potential “banana peels” out there right now for investors, but regardless, he remains confident a value-orientated approach can protect investors’ assets against downside risk over the long term.
“We have started to see the interest rate cycle turn, yet value has not outperformed yet,” says Mr. Harper. “So, there is a disconnect, and I think that is due to all the geopolitical uncertainty. Ultimately, if markets settle down, I would expect to see stock picking and value as a style do better.”
To learn more about value investing and Templeton mutual funds, please visit: www.franklintempleton.ca
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