‘Value investing’ has entered a phase of decline.
The coronavirus crisis has left important lessons for investors. Portfolio diversification does not always work and, therefore, mixed funds must be truly flexible to act as standard bearers and survive in all types of market environments, while the ‘value investing’, so fashionable in Spain in recent years. years, it has entered a phase of decline that will hardly manage to reverse in the short term. These and other issues have been analyzed by various wealth managers in a debate organized by Crédit Mutuel Investment Managers and Bolsamanía. If the post-Covid recovery already shows any specific symptoms, it is that investors may be facing a “quite bullish” period for the stock markets thanks to the support of governments and central banks.
To grow their money, investors must first preserve their wealth. “It seems obvious, but it’s not that obvious.” The monetary policy of central banks with persistently low rates to alleviate the great financial crisis of 2008 has led many savers to become investors and, also, to the fact that the latter increase their risk profile without fully understanding the consequences that have. “People forget that, to recover 10%, you don’t have to go up 10%, but much more,” recalls David Córdoba, director of sales at Crédit Mutuel Investment Managers. “Our work, if it was complicated before, is going to be more complicated from now on because the model is very uncertain and everyone is looking for visibility in the companies they invest in,” says the manager. And to find that visibility, you have to buy more expensive quotes: “The‘ spread ’of good companies will continue to increase compared to bad companies, but you have to live with it.”
Financial markets are also entering a “new normal” in which “the classic 50/50 mixed funds of variable income and fixed income no longer work,” says Jorge Martret, director of Investments at Norz Patrimonia. This financial advisory firm, which does asset allocation with options, believes that “there are many sources of return to be touched.”
“As fund selectors, it is of no use to us that in a weekly committee the managers decide that equities will drop 5% in their core strategy. It helps us, for example, to put a put on the S&P 500 in its multi-asset star fund and undo it on the same day if necessary. That is true flexibility, ”says Andrés Vázquez, wealth manager at Bankinter. “We cannot protect a portfolio of funds with as much flexibility, so we have to find the managers who do with their funds,” he adds.
Times change and they do it faster and faster. “What used to happen in a year, now happens in a month”, puts into context Alberto Loza, senior manager and head of Institutional Relations at Norwealth. “You have to have your wallet ready for the bad times beforehand, because then no windows open. In the case of mixed funds, they must have a vocation of patrimonial protection focused on the different scenarios, almost ‘total return’. The correlation between the assets is punctually very high, although in the long term they are de-correlated ”, considers the manager.
Everyone agrees that since Donald Trump began to govern the United States in 2017, the market environment has become very changeable and very few funds in the sector are truly flexible in the face of such changes. “Profiled funds”, the banking star product for five years, “have not responded well either because they have very strict forks of movement”, according to Córdoba, from Crédit Mutuel Investment Managers, and the vast majority of them lose money. Professionals who advise and manage client portfolios demand funds that can move freely in variable income, from 0% to 100%, even that they fall short if the situation is adverse and requires it, thus giving the manager a mandate of ‘asset allocation ‘that can be widely used to invest in the stock market, bonds, derivatives, alternative assets or to become liquid. A good example, they point out, is the BL-Global Flexible fund, with five Morningstar stars. Managed by Guy Wagner, this year it rises 1.2% despite the pandemic.
THE DEATH OF THE ‘VALUE’
Asset allocation seems vitally important in the new post-Covid times. “In Spain, we have an excess of Warren Buffett investors who worry a lot about the selection of companies and completely forget about the process of building portfolios, and then what happens happens,” criticizes Martret, aware that “the construction of portfolios it is 70% or 80% of the profitability ”that an investor achieves.
The ‘growth’ style has beaten ‘value’ in the last decade and, although there are different voices that warn that the market is turning in favor of the second style, the managers participating in the debate do not believe in this theory . According to Loza, “in the long term, you can only earn money in equities, but in ‘quality growth’,” which is “the champion of this crisis.” “Although these companies have been around for years, there are reasons for this and they will continue to do so. They are sectors with visibility and predictable results ”, linked to the new economy, as is the case with the Wall Street technology companies.
“The ‘value’ is dead, understood by traditional companies that are cheap. You have to bet on “growth” pure and simple. ” That’s how resounding Vázquez is. Martret underpins this touch of attention: “As everyone now does‘ value ’,‘ value ’has really remained the bad thing”, and that is what is weighing down many managers specialized in this style of investment.
The wind blows in equities because governments and central banks have aligned in their respective aid packages. “Banks and public debt will no longer be supported”, as happened in the previous crisis, “but companies”, although this “will increase the gap between the real economy and the financial economy,” predicts Vázquez. The manager, positive in sectors such as new energy or technology, predicts that “the prices we are going to see in equities will be unrealistic in the coming months or years.”
THE FIXED INCOME DILEMMA
For the rest of the year, the other major concern is fixed income. “In the short term, we are not scared with all the support it has,” says Loza. At their firm, they are substituting 10-year American bonds as a buffer for portfolios with other assets such as covered bonds, mortgage bonds, municipal bonds or credit, taking advantage in this case of the ECB umbrella. “It is the only thing that can protect you in these circumstances.” For his part, Vázquez looks at emerging debt, ‘high yield’ and convertible bonds, in his opinion the only salvageable within fixed income.
At Crédit Mutuel Investment Managers, their funds have a ‘quality’ bias in equities and, in fixed income, “although it costs us money, we have German bonds as a refuge,” says Córdoba, its manager in Spain. They have also mounted positions around physical gold and gold mines, “a kind of ‘proxy’ to the physical gold fund although with much broader movements.” Regarding this last substrategy, he clarifies that, “occasionally it may not de-correlate with the variable income, but in the long run it is the only real refuge asset”.