How to find value in a new world: maybe it’s not so new

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Is value coming back? It had a little flutter in September and then sank back to its mire of the past eight years in Australia and 12 years globally. The differential between value and growth/quality is the widest and longest since the 1930s. If mean reversion is a statistical fact, value has to come back soon. Very soon.

Gregory Kolb, the CIO and portfolio manager at Perkins, a Janus Henderson global equities manager, likes to quote Jim Grant, a former finance journalist at the ‘Baltimore Sun’, and then ‘Barron’s’, who built one of the world’s most influential interest rates and currency information services, ‘Grant’s Interest Rate Observer’. Grant, born in 1946 in New York and raised on Long Island, still resides nearby, in Brooklyn.

He said, according to Kolb, that “most of human knowledge is cumulative, but in the financial world it tends to be more cyclical.” It does seem that there’s a fairly narrow leadership in the financial world, Kolb says. And, like all value managers who have endured the pain of the last few years, Kolb sincerely hopes that Grant is right – that it’s cyclical.

The big sectors which have been adversely impacted by the outperformance of, particularly, US large-cap growth stocks such as the tech-orientated companies, are the banks, auto manufacturers and distributors and traditional energy companies.

In the MSCI World index over the past five years, tech stocks have risen a cumulative 125 per cent. In the consumer discretionary market, led by Amazon, which is classified as a retailer, the rise has been 60 per cent.

“In the bond market you can see a similar cycle,” Kolb says. “There’s a lot of pessimism. We are seeing that growth is being bid up at any price… There looks like a parallel with the tech bubble of the late 1990s. That was an exciting bull market. This time it’s not as exciting. This one is more fearful,” he says. “We try to learn from the past.”

With the ‘autos’, Chicago-based Kolb says, there is both a cyclical and secular trend underway. The electrification of the combined fleet of autos will happen, although it is unclear when. And the big traditional manufacturers are participating. It’s not all about Tesla.

With traditional energy, oil and perhaps natural gas will tend to be substituted away, Kolb says. But, like with the autos, the big energy companies tend to be participating in the substitution process too. In Australia, for instance, the corporate world is ahead of our Government in addressing climate change. AGL is still the biggest user of dirty coal but it is also the biggest investor in solar energy generation.

And with the banks, technology is changing their businesses, Kolb says. It is changing the way they access and communicate with customers. The banks are adapting, too. “We think there is a lot to be said for the banks as investments,” he says. “They are entrenched in a way that is not going to go away anytime soon.”

Perkins, which was founded in 1980, became an affiliate of Janus and subsequently fully owned, has about US$11.5 billion under management. About US$4 billion of this is in global strategies. It is the ‘value side’ of the old Janus business, and remains so under the successful merger of Janus with Henderson.

There exists the “scar of 2008” syndrome for older investors. But for many younger ones, over the past 10 years, say, they have only seen the outperformance of the big growth/quality stocks.

Kolb joined Janus in 2001 as an analyst. Prior to that he was in investment banking. He says he has always had an interest in investing, having bought his first stock at about age 14.

But Perkins is not what you’d term “deep value”. “We focus on companies which we think will grow over time,” Kolb says. “We just don’t want to pay for what’s driving it at the moment.”

– G.B.

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