Rotating (back the other way)
Rotation continues to be the investment word of 2021. The issue now though is that rotation is going in the opposite direction: out of value and inflation trades and into growth. The cause of this was the meeting of the US Federal Reserve (Fed) last week, where it decided to bring forward the pace of interest rate increases, with two now expected in 2023 and one a possibility in 2022, as well as now talking about tapering the bond buying exercise. The message was clear: we are sensitive to inflation (in case anyone ever doubted) and will act as needed. This has reigned in the narrative of the Fed letting inflation get out of control, a narrative that has supported value and commodity outperformance in recent months. On the other side, growth has made something of a comeback.
A more subtle influence on the new direction of rotation, and one we think hasn’t had enough publicity, is that some of the structural damage on value sectors is becoming more apparent. A good example of this is leisure, where after an initial bounce post lockdown some of the more recent data suggest we are not returning to shops and restaurants in the unbounded way that was expected. Maybe ordering Deliveroo and buying goods and services online is the new norm. Of course, we need more evidence than a few months, and areas such as travel are still very restricted, but at some point reality will kick in and we will find out how meaningfully society has changed because of the pandemic. Our view is that these changes will be pro ‘growth’ and anti ‘value’.
The dogs bark, but the caravan moves on
This is one of our favourite non-investment, investment sayings. Its exact origins are somewhat unclear, but it is thought to be Arabic. It was apparently first used to refer to the caravans travelling through the desert regions of the Middle East. Dogs bark as the caravan slowly moves toward its destination, but their bark is not enough to stop it reaching the end of its journey. It is meant to mean progress moves ahead, no matter what criticism it will attract.
This is a saying we have thought lots about this year. Our goal is to support the transition to a more sustainable society (our caravan), a goal which we think has increased in relevance in recent years and one which is clearer than ever in terms of its ability to deliver good investment returns. Despite this conviction, the dogs have most certainly been barking. In the last six months a portfolio of sustainable investments has underperformed one of non-sustainable ones, and at times quite markedly. The metaphorical dogs have barked ‘value investing is back’, ‘sustainable investing is a fad’ but many of our investments are seeing stronger prospects today than they ever have done. Recently we have a sense that the dogs have started to quieten down. Either way, the caravan moves on.
Styles of investing
Most of the last six months we have been talking to clients about investment styles and their relative merits. Investment styles are often presented to investors like religion: you must pick one then defend it to the hilt. This is something we have always struggled with. Over a long, multi-decade career, it is reasonable to expect there will be evolution in markets and investing that will require new skills to be learnt and old ones to be forgotten. Painting ourselves into a corner early in our careers and forever thereafter seems a blunt approach to us. Here are the three main styles and how we think about them:
- Growth – growth investing is about investing in the future. It is about investing in companies which create new end markets, through the provision of products and services that it may not have been possible to produce in the past. This could be cloud computing, cancer treatments, ESG data or electric vehicles. It needs imagination and creativity and its upside is almost limitless.
- Value – value investing is about fixing the past. It is about taking industries and businesses which have fallen out of favour, perhaps due to bad management decisions and/or industry change and being part of the process of fixing those problems.
- Momentum – momentum investing is the investment equivalent of atheism. Share are prices which move up and down, not fractional ownership of a business. Momentum investors care not about what they own, just that it technically looks good from earnings and share price momentum perspective.
I spent the first years of my career with a value bias. This was because reversion to the mean in the corporate world was a powerful force. Those companies out of favour, due to bad management for example, were often turned around as their end markets remained relatively stable; buying out of favour companies and selling the over loved was an effective approach. This changed in the late 2000s, when technology and the internet became so pervasive that whole industries (think media and retail for example) were disrupted by new entrants. Reversion to the mean stopped working and growth became the dominant investment style and has been ever since. Momentum has been ever present as a style of investing and one that is unlikely to go away. We sometimes use it to time our entry into investments we want to make anyway and to understand market sentiment, but in the end find it the least rigorous way of thinking about investing.
What happens next in the growth vs value debate? It certainly won’t be decided by the inflation outlook, as many think, but by the corporate world and trends within it. We think investing in the future, given the many and proliferating tools for innovation, makes much more sense than investing in the past where the consequences of this innovation will have the most negative impact. We are however determined to keep an open mind on the different ways we can invest.
Performance is improving
Regular readers will know that since vaccine day last November, when the first vaccine trials results came out, ownership of our sustainable funds has been less profitable than other strategies. To be clear, we have benefited from the increased optimism around Covid, just less so than other more value and commodity related strategies. However, the last few months though has seen an improvement in performance, with many of our funds at all time price highs with top decile performance against our peers over three months (Past performance is not a reliable indicator of future returns. Source Lipper, as of week ending 18 June 2021). This reflects the good performance of the companies we own and a more balanced market environment. We still have some catching up to do on year to date numbers, but we are pleased to see this improvement. Long-term numbers remain excellent.
Our team is expanding
In the last 18 months the RLAM Sustainable franchise has made good progress, with AUM increasing from c£4bn to c£11bn and the globalisation of our product range to include new global equity and credit funds. This has increased the scope of work we do on an ongoing basis. Last year we added to our resource with George Crowdy and Sebastien Beguelin enhancing our equity capability, and Shalin Shah, Rachid Semaoune and Matt Franklin, from the RLAM Fixed Income team, taking on extra Sustainable responsibilities.
This year our focus has been to enhance our research capability further as our Sustainable investment processes become more sophisticated. As a result I’m delighted to welcome Tom Johnson and Daphne Tsang to the team. Tom was a member of the RLAM Responsible Investment team before transferring over, and Daphne joins us from Redburn where she was a European Banks analyst and involved in the role out of ESG within that organisation. We will continue to add resource where we think it will benefit our clients. Watch this space!
Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are the author’s own and do not constitute investment advice.
Royal London Sustainable Managed Income Trust, Royal London Sustainable Managed Growth Trust, Royal London Sustainable Diversified Trust, Royal London Sustainable Word Trust and Royal London Sustainable Leaders Trust are held within RLUM Limited Unit Trusts, which is an authorised unit trust scheme. The Manager is RLUM Limited, authorised and regulated by the Financial Conduct Authority, with firm reference number 144032.
The RL Global Sustainable Equity Fund is a sub-fund of Royal London Equity Funds ICVC, an open-ended investment company with variable capital with segregated liability between subfunds, incorporated in England and Wales under registered number IC000807. The Authorised Corporate Director (ACD) is Royal London Unit Trust Managers Limited, authorised and regulated by the Financial Conduct Authority, with firm reference number 144037.
The RL Global Sustainable Credit Fund is a sub-fund of Royal London Asset Management Bond Funds plc, an open-ended investment company with variable capital (ICVC), with segregated liability between sub-funds. Incorporated with limited liability under the laws of Ireland and authorised by the Central Bank of Ireland as a UCITS Fund. It is a recognised scheme under section 264 of the Financial Services and Markets Act 2000. The Investment Manager is Royal London Asset Management Limited. Most of the protections provided by the UK regulatory system, and the compensation under the Financial Services Compensation Scheme, will not be available.
For more information on the funds or trusts or the risks of investing, please refer to the Prospectus or Key Investor Information Document (KIID), available via the relevant Fund Information page on www.rlam.co.uk.