Style bias puts value on top, for now

It is as spectacular a fall from grace as you are ever likely to see. In the heady days of 1999 and early 2000, stock markets were floating on a wave of tech-fuelled euphoria, investors were settling into the repetitiveness of hugely favourable investment returns and growth style managers were masters of a buoyant funds management environment.

Meanwhile, value managers, suffering from comparatively poor investment returns, could do little but bide their time.

Fast forward to today, where the technology bubble has well and truly burst, where the performance of most growth managers has headed decidedly south and where value managers have more than taken their revenge.

The latest InTech performance survey of fund managers for the 2001 calendar year, has value managers continuing the domination they established over growth managers following the tech-wreck in early 2000, to take out the top spots for both Australian and international equities.

The Australian equities performance race was won by relative newcomer Lazard, which returned 26.2 per cent for the year.

Lazard was followed by Perennial with 23.9 per cent, Tyndall with 23.6 per cent and the evergreen value manager, Maple-Brown Abbott, with 19.6 per cent.

At the other end of the scale, managers who were performing well in the growth era only a few years back, such as BNP Paribas, Credit Suisse and Deutsche, are now occupying the bottom rungs of the 2001 performance ladder.

It is a similar story in international equity markets, where strong value managers, such as Marathon and Bernstein, continue to relegate growth managers to the realm of also-rans. The strong performance has proved a boon for value managers.

Last October, Lazard won a $1.5 billion mandate to manage money on behalf of MLC and National Asset Management in what was believed at the time to be the single largest active Australian equities mandate ever awarded in this country.

The size of the mandate was not only a reward for Lazard’s excellent performance, but also recognition that, through heavy demand, many good value managers were already reaching a point where they could no longer accept new investors.

The popularity of value managers would no doubt have proved disturbing for growth managers, who have found investors harder to come by of late. In addition, some observers are now not only questioning the short-term performance of managers, but also the very validity of growth investing.

Visiting Australia last year, Deutsche Asset Management’s UK-based chief investment officer Karl Sternberg summed up the feeling best when he described the distinction between growth and value as essentially artificial.

“Growth is one component of value. That distinction [between value and growth], invented by US consultants, and quickly accepted as the unthinking conventional wisdom, will wither, as it rightly should. There will be valuation-based investors and that is all,” Sternberg said.

Of course, it is not all doom and gloom for growth managers. International markets recovered moderately in December, spawning an improvement in more growth-oriented stocks. As a result, growth managers outperformed value managers for the month.

Was this the first sign that the tide had once again turned in favour of growth managers?

Not quite. Even growth managers concede that December was a mere aberration and that in the early part of any market recovery, investors are more likely to cling to cyclical stocks, which have traditionally tended to be more value oriented than anything.

The bottom of this particular downturn for growth managers is also likely to prove even deeper than in previous slumps, given the relative fortunes of Australian and international equity markets at the moment.

Usually, even when growth stocks in Australia are doing poorly, the offshore earnings potential of at least some of these stocks provides some hope to good growth managers. But in this downturn, with the Australian economy significantly outperforming that of most other countries, even that small glimmer of hope has disappeared.

“In each investment cycle you will have a period when growth stocks will do well, but we are not there yet. I still think that we have to go through a period of people chasing cyclical stocks. But as the year unfolds and global growth picks up, the market will once again start to look at growth stocks,” Credit Suisse head of Australian equities Craig McCourtie says.

While a change in fortunes for growth stocks may still be over the horizon, another possible future is on the cards. In the latest review of Australian equities managers by van Eyk Research, style neutral managers were shown not only to provide more consistent returns in the three years to September 30, 2001, than both growth and value managers, but also to do so with a lower tracking error.

If that is the case, and investors who chase returns are forced to once again ride the growth/value see-saw, then perhaps it is style bias itself which is destined to ultimately become unloved.