Has the value comeback been postponed?



Alex Crooke, Fund Manager for Bankers Investment Trust, explains why his predictions for the second half of the year have changed as political uncertainty continues to hamper business confidence. Alex also gives an update on asset allocation within the portfolio, particularly in light of the China-US trade war.


Q: Welcome to the latest video update for The Bankers Investment Trust. I'm joined by the portfolio manager Alex Crooke. Alex, thank you for joining me.

So Alex around the beginning of the year you spoke about the possibility of there being a shift around the second half of the year, with value stocks poised to outperform growth. Is this still your view? Or has anything happened over the past six months to perhaps make you reconsider or reinforce that view?

A: I think my views about a value recovery in the second half have changed. I think they've been pushed out much further, maybe into next year. And I think the dynamics that have shifted are the politics at play in macro markets and the world, have really come to now affect people and businesses. So if we go back to the beginning of the year, even I thought that Brexit would get solved some time around the hard stop that we had in March and that's been pushed out to the end of September.

The same with trade discussions, Trump and the US managed to get trade discussions with Canada and Mexico over the line quite quickly but clearly with Europe and China these are going to be much more extended. And I think the challenges we're seeing now are for consumers buying a house and large ticket items like cars, we're seeing very strong, very slowing sales in these areas. So I think the indecision in politics, in how the world is behaving, is affecting real people and investment plans and the same thing in businesses.

So my view of value stocks having a better recovery is predicated on some stronger growth coming in the global economy. It's very clear that we're still in a soggy, slow growth environment. So I think we've got to look forward. I still have the view that they will recover but I think it's probably pushing into next year now.

Q: So keeping with this theme of value versus growth, the definition of value is fairly subjective with different metrics and methodologies for measuring value. But meanwhile in an age of technological disruption it seems many investors are happy to pay a very high premium for growth companies which don't pay a dividend and may in fact be loss making. What do you make of this phenomenon?

A: I think it's a very good question of what is a value stock and what is a growth stock. And to me I think the area of value investing that is difficult is when you look at the value of business or the assets it owns, the value of its factories and the value of its patents. That is where you can get unstuck in current markets. And the reason there is that disruption occurring in a lot of industries; we see it in banking, we see it throughout the consumer retail area and therefore the value of assets is a very difficult thing to put a number on going forward.

When I think of value, to me it's more about where is the market being too pessimistic about the growth prospects for a business? So it's a perfectly good business with good assets, with good trademarks or whatever it may be but the markets decided there's a cloud out there, there's an uncertainty and puts a discount on the value. And my job is to evaluate those and find the right businesses that can grow and can use new technologies.

In the banking sector the banks are very adept at online banking, where are the winners in that? And where can I find good value and not overpay? Equally at the other end we do need growth and we want some growth stocks but let's not overpay. Let's not overpay for hype; for where investors are just rushing in because it's interesting and it's new. We should find the real businesses, the real winners over the longer term and let’s support those and just be more careful of the others.

Q: Many investors are understandably quite nervous about the coming months ahead with many commentators predicting an end to the US equity bull market and the subsequent ripple effect onto other markets, as well as the Brexit saga and the US-China tariff war giving investors a headache. What are your thoughts on some of these macro level uncertainties?

A: Well I've mentioned some of those already. I do think that discussions around trade tariffs are the most important aspect of the future to settle down because we're investors in global companies and we need to trade frictionless around the world. So I think getting some certainty around that, what are the new rules that we're playing at? Is incredibly important and I think that's going to be into next year. I think it could get resolved in 2019, but I think it's a 2020 story.

So I think just being a bit cautious has meant that I've raised a little bit of cash within The Bankers portfolio. So we've been selling stocks; we normally sell stocks that have reached certain price targets that we feel are full and expensive and instead of reinvesting that I've just kept it back waiting to see where this uncertainty throws up some interesting opportunities.

Q: Have any of these factors influenced your asset allocation at all?

A: So what that's meant for asset allocation is that probably our largest seller of stocks is in both Europe and America. These are markets that have done particularly well this year. They've recovered [based on] different dynamics the US has got good growth and the growth stocks have done very well. In Europe, it got very cheap, last year it had a very poor 2018 and we've seen some recovery in share prices. So in both markets we felt that maybe the optimism there is too high and we've taken some profits. So we've seen a little bit of reduction in our U.S. and Europe [holdings] and an increase in cash within the portfolio. We now have no gearing within the Trust and we have a small net 2% cash position at the end of June.


Gearing: A measure of a company’s leverage that shows how far its operations are funded by lenders versus shareholders. It is a measure of the debt level of a company. Within investment trusts it refers to how much money the trust borrows for investment purposes.

Bull market: A financial market in which the prices of securities are rising, especially over a long time.

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