Value investing with Wellington's Opportunistic Value team
By Conor Hafner, senior investment product specialist, Vanguard Europe
After a decade dominated by growth stocks, there is a growing sentiment that the 2020s will see the pendulum swing back in favour of ‘value’, with signs of a rotation away from growth stocks in the final quarter of 20201.
We’ve heard this before, of course, with premature declarations about the return of value only fuelling the notion that value investing is a thing of the past. This time, however, there might be good reason to believe the end of the ‘value coma’ is coming.
Over the next decade, our Investment Strategy Group (ISG) expects global value stocks to outperform growth, although this will be driven primarily by a contraction in the valuation of most growth stocks, rather than as a result of valuations of value stocks returning to the levels seen in prior decades2.
We know that style rotations commonly occur after long periods of outperformance3, which is why at Vanguard we believe that maintaining a balance between growth and value is a sensible approach to long-term active equity investing. That’s the thinking behind the Vanguard Global Equity Fund, with 50% managed by Baillie Gifford’s growth-focused Global Alpha team and 50% managed by Wellington Management’s value-driven Opportunistic Value team.
In this blog we take a closer look at Wellington’s Opportunistic Value team, shining a light on the unique investment philosophy that underpins its competitive edge and why Vanguard trusts the team to manage our shareholders’ investments.
Before we dive into the Opportunistic Value team, it’s important for context to understand the team is part of one of America’s largest investment firms in Wellington Management Company, with assets having grown to over $1 trillion since it was founded in 1933. Wellington is also our largest investment partner, managing in excess of $399 billion4 on behalf of Vanguard clients – more on that later.
‘When people become emotional and frustrated, that is when we come in’ – David Palmer, Portfolio Manager, Wellington Opportunistic Value team.
The philosophy behind the Opportunistic Value team’s approach was conceived by famed value investor John Neff and taken on by David Palmer and his team of six analysts. It takes the traditional element of the value investment style – identifying deeply mispriced companies with moderate risk expectations – and blends it with strategies designed to exploit inefficiencies in the market, and in particular those created by behavioural biases.
“The starting point for our investment is usually others’ endpoint,” Palmer says. “You need to find a time when smart people are not making smart decisions, and that is usually when people become emotional, frustrated or disappointed with their results. That is where we come in to engage on the other side.”
This work has paid off time after time. Take US-based data centre owner Equinix for example, which Palmer’s team originally bought in October 2018 when it was trading at $376. At that time, there was a growing concern that the company’s organic growth was decelerating due to increased industry competition and high capital expenditure requirements. Conversely, Palmer’s team held the belief that Equinix’s pricing power and growing demand for cloud computing would benefit the company. Since initiating a position in the company, Equinix has shown no deceleration in revenue growth and at the time of writing, shares in the firm were trading at $719.
Wellington’s team looks for inefficiencies created when investors wrongly evaluate the probability of a certain outcome. It’s the logical consequence of people getting spooked by daily headlines and losing sight of the bigger picture. What the ‘opportunistic’ part of the Opportunistic Value team aims to do is identify those stocks that are lagging merely because the market has mispriced a risk. “Our research focuses on trying to take some of those negatives off the table,” says David Palmer. “Therefore, if everything on average does a little better across our portfolio, then we should win.”
A symbiotic relationship
There is something of a symbiosis between Vanguard and Wellington, owing to the fact that Vanguard’s founder, John C. Bogle, helped build the Wellington business. Beginning in 1975, the relationship is based on a continuity of thought and process that aligns perfectly with our understanding of how risk should be managed within a portfolio. Our Oversight & Manger Search team is in regular contact with the manager and analysts running the portfolio, sharing insights and reviewing ideas.
Value as a style may not have been in favour over the past few years, but history suggests these trends tend to come and go in cycles – and Palmer’s team are well positioned should the tide indeed turn in favour of the team’s value focus. Either way, the team’s philosophy and discipline under Palmer’s guidance is a key factor in the trust Vanguard has in its ability to manage our shareholder’s investments.
Along with Baillie Gifford’s Global Alpha team, Wellington’s Opportunistic Value team has helped the Vanguard Global Equity Fund beat its benchmark, the FTSE All World Index, by 2.22 percentage points (pp) on an annualised basis since the fund launched in May 20165. The fund has outperformed its Investment Association peer group average by 2.85pp (annualised) since inception6.
The talent, philosophy and quality of process that characterises Wellington typifies the active edge that Vanguard is looking for in its active equity managers. In our next blog, we will explore the other half of the fund’s portfolio by examining the qualities that Baillie Gifford’s Global Alpha team brings to the .
1 MSCI World Value Index outperformed its equivalent growth index by 3.14 percentage points. MSCI, Vanguard calculations. Data between 1 October 2020 and 31 December 2020.
2 Vanguard Economic and Market Outlook 2021.
3 MSCI and Pzena. Comparison of MSCI World Value Index relative to MSCI World Growth Index. Data period: 31 December 1974 to 30 September 2020.
4As at 31 December 2019. Source: Vanguard.
5, 6 Vanguard and Morningstar. Data between 25 May 2016 and 31 December 2020.
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