Growth versus Value: the reversal

17 mei 2022

Dear investors,

After a small breather in March, equities continued their decline in April. The MSCI All Countries fell by 3.0% during the month – a relatively mild drop compared to technology shares, which fell 7.3%. Conversely, some sectors like basic resources, utilities and food, beverages and tobacco are navigating this difficult year with exceptional ease. As the graph below shows, the tech sector is not as invincible as some people had imagined as its drawdown is now quickly approaching the one the composite experienced during the initial weeks of the covid pandemic.

The comeback of value on the other hand is a boon to the (few) investors that stayed loyal to the investment style over these past few years as the drawdown of Value (-5.3%) now compares extremely favorably with Growth (-22.8%). With Vector we tend to play all styles, attempting to lower the drawdown of any single factor that is having a bad streak and riding the momentum of those that do well. While our results were lagging a bit in recent years due to the headwind of being under-allocated to mega-cap growth stocks compared to our benchmark index, we are now quickly closing the gap with the MSCI All Countries as it are exactly these type of companies that are going out of favour. 

Yet, contrary to what you might expect, it aren’t the allocation effects that are driving our alpha this year. While we do profit from our underallocation to large growth stocks (+1.79%), this is more than offset by our allocation to smaller companies (-2.07%), which are generally having a bad year. So, overall, the allocation effect of our portfolio was slightly negative (-0.44%). Our alpha in 2022 is being completely generated by a stock selection effect, where we were able to select the right companies in all but one (Mid Value) of the nine Morningstar Style Boxes. Especially within the Consumer Cyclical, Healthcare and Technology sector we were able to make the right calls.

As a result, Vector Navigator was only down 3.11% by the end of April, a performance that is 4.28% higher than our Morningstar competitors. Vector Flexible, which hedges a substantial part of the market risk, also profited from our stock selection alpha and as a result only lost 0.31% so far. With this performance the fund was able to outperform the competition by 5.96%, as most other funds make use of bonds to lower their equity exposure and the drawdown on these instruments in these past few months has been especially severe due to the more hawkish stance of central bankers.

Best regards,

Werner, Thierry & Nils