Active equities beyond the pandemic (part 2): The value viewpoint
In support of our Active Investor Conference, we invited the managers of our active fund range, including external portfolio sub-advisers, to share their views on how to extract alpha from their respective markets in the post-pandemic era. In part two of our active equities blog, we glean insights from David Palmer’s Opportunistic Value team at Wellington Management, which manages 50% of the Vanguard Global Equity Fund.
By David Palmer, Portfolio Manager, Opportunistic Value, Wellington Management
There’s no denying value investing has been a difficult hunting ground for managers seeking alpha over the past decade, but as we stand today the outlook for skilled value managers is highly promising. We’re seeing strong potential for value stocks where the underlying earnings are growing faster than more traditional growth companies and – pending the continued success of Covid-19 vaccine rollouts – we believe value as a style could outperform over the coming years.
A successful vaccine rollout remains an important factor here as the conditions for an economic revival are supportive. If, for example, the vaccines are less effective against newer and emerging variants of the virus and we see another wave of national lockdowns, then it’s quite likely that many value stocks for which performance is dependent on economic growth will suffer as a result. In a scenario where the economy returns to a more ‘business as usual’ state, with an effective vaccine enabling spending behaviour similar to pre-pandemic patterns, we believe value as a style can be a dominant factor for the foreseeable future.
Part of the reason we are excited is that many value stocks are coming from the very bottom. Some might point to the ‘value rally’ since the final weeks of 2020, but in reality, it’s been two quarters of outperformance coming on the back of a steep fall in the March 2020 sell-off. In truth, value is coming out of a trough, and we’re starting to see some impressive earnings and cash-flow growth. When coupled with our focus on identifying idiosyncratic value opportunities, these broader trends support our optimism looking ahead.
Opportunity in uncertainty
A tendency for investors to underestimate the rebound from the bottom is an opportunity in itself. At Wellington, we believe that theories of human behaviour in the face of material loss or unexpected disappointment are relevant and present investment opportunities in the real world. By recognising human behaviours, like loss aversion, recency bias and anchoring, for example, our team taps into the vast research network at Wellington to identify stocks that other investors are being convinced to sell at a price well below what we believe to be its fundamental value.
It is at times like the current situation, where investors are being forced to make decisions under elevated uncertainty, with a wide range of possible outcomes, that we see the greatest opportunity to generate alpha. Within the Vanguard Global Equity Fund, not only are we finding compelling opportunities in traditional cyclical sectors, but we are also finding attractive company-specific valuation-based opportunities in several less economically sensitive sectors.
Our largest absolute exposures are in technology, financials and consumer discretionary, while our largest over weights relative to the benchmark are in real estate and utilities1. Regionally, we’re finding more attractive risk-reward trade-offs in companies outside of the US. Most notably, in developed Europe we are finding many companies with special value drivers and the potential to benefit from any value-style tailwind should economic conditions improve.
Extracting value from ESG focus
We see opportunities to generate alpha through our proprietary environmental, social and governance (ESG) research and analysis. We believe ESG analysis is fundamentally important because it shows a management team’s focus and awareness of risks in certain parts of their business. Moreover, the rising importance of ESG within the investment community has changed what a growing number of investors consider to be investable or not investable, at any price.
Today, many investors rely on third-party ESG rating providers to inform their investment analysis, whereby a poor ESG rating can warn investors off. As I’ve previously alluded to, our starting point is often others’ end point on a stock and we look for companies at their most uncertain moments. That’s why Wellington has established an ESG research department to help interact with companies and advise our portfolio managers about where companies are today and where they are going from an ESG perspective.
As a portfolio manager who's looking at stocks that are being discarded and snubbed, it’s vitally important for me and my team to understand what is really going on and what would make firms investable again.
1 Source: Wellington. Data correct at 31 March 2021.
To hear more from David and other experts in the active equity space, watch the sessions from our Active Investor Conference on-demand and claim your CPD.
In case you missed it, read part one of this blog on active equities by growth investor Helen Xiong, of Baillie Gifford’s Global Alpha team, here.
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