The last decade – and especially 2020 – have been tough on value investing, compounded by the strong performance of growth companies and large scale social and structural strange. 
This year has disappointed those who thought that value investing – or buying companies with low valuations in anticipation that the situation would revert – would rebound after an extended period of underperformance against the growth style.
Some investors continue to expect value to surge, pointing to the likelihood that the world is entering the early stages of an economic recovery and signs that inflation could be returning, both conditions which have historically favoured value.
However, James Budden (pictured), director of marketing and distribution at Baillie Gifford, believes that investors may be waiting rather a long time for that reversion in the current climate.
Performance of value vs growth
Source: AQR
Prior to 2020, value companies were trading at their highest discount to growth stocks for decades and, rather than snapping back to previous levels, the Covid-19 sell-off and extended periods of lockdown widened the gap between the two.
“The idea of value investing is plausible, finding undervalued stocks then watching them revert to their normal price,” said Budden.
“People are hoping for this return or reversion to the mean where value investing will have its time in the sun again.”
A lot had gone against the value style in the 10 years since the 2008 financial crisis and growth has consistently outperformed, aided by the low interest rates and a lacklustre economic expansion.
While investors have waited a decade for this, the Baillie Gifford marketing director said it’s unlikely to happen anytime soon.
“It’s a double whammy, the reason these value stocks are cheap is because they’re not very attractive,” he explained.
This goes beyond the traditional cycles of valuation that companies go through and is representative of seismic structural change.
“While this crisis has been very bad for value investing, it has surprised on the upside for growth investors,” he said.
“What we’ve seen is a return to size and instead of reverting to the mean, the bigger and more successful companies have got bigger and more successful during this pandemic.
“That gap has widened again.”
Budden argued that the inherent flaw of value investing is the perception that things will sort themselves out over the long term.
In a Trustnet article from June 2019, Budden detailed the Baillie Gifford actual investing strategy, looking to redefine the role of active management which can are too focused on short-term market sentiment.
“It’s now the norm for active managers in the UK to be value style investors,” he noted.
“We’re believers in finding great companies and holding them for a long time. It’s a throwback to the fundamentals of capital allocation.”
The marketing director argued that these principles are not evident in value investing.
“Buying things cheap and hoping they’ll go up is not really allocating capital in that sense, considering it’s being allocated to some pretty ordinary companies,” he said.
“It’s unhealthy to argue over the neat idea that value will come back, and growth will fall away. It hides the fact there are some strong growth companies out there and a lot of the market is being completely disrupted.”
“Behaviours are changing and have changed, and this is where value investing falls down.”
This is reflected in the performance of funds in the Baillie Gifford range, which have made some of their sector’s highest returns over 2020 so far. In addition, many are among the top funds of their respective peer group over the past 10 years.
Performance of Baillie Gifford funds YTD
Source: FE Analytics
“The world we’re living in, we’re seeing more ecommerce, more food delivery, online entertainment and acceleration to the cloud. We’re positioned in all of these businesses,” Budden added.
“We’ve been in the right places and benefitted from their acceleration by Covid and the crisis.
“We’re all about the upside rather than the downside. It’s not about mitigating loss or dampening volatility against an index, it’s about trying to find really good companies that can grow their cash flows,” he finished.