Produced in partnership with Orbis Investment Management.
Growth stocks have had a stellar run, delivering some relatively easy returns for the past 20 years, however, current multiples and margins are not sustainable, requiring investors to temper their expectations, seek alternative sources of alpha and achieve genuine diversification.
According to Orbis Investment Management investment specialist Eric Marais, growth stock valuations have become stretched relative to value stocks, providing “some sort of indication for the long-term”.
“[The industry] definitely has been guilty of being the boy who cried wolf around market regime changes,” he told Professional Planner.
“The reality is, you never know for sure but geez growth stocks have had a great run, and there’s a school of thought out there that something has changed permanently to make growth stocks sustainably, secularly winners at the expense of value but…we need to balance that with a 200-year history of value stocks outperforming growth.”
At this stage in the cycle, Orbis is finding more attractive value opportunities than growth.
The manager, which previously held mega-cap US tech stocks like Facebook, Apple and Amazon, believes that the valuation gap between those companies and other segments of the market have grown so large that it is “quite convinced that value, as a style, could do better than growth over the next five, ten and 15 years,” Marais said.
The strong performance of growth stocks, and equities in general, is causing an increasing number of investors and advisers to question their overall exposure to equities.
The appropriateness of the traditional 60/40 portfolio construct has also faced recent criticism, following the disastrous performance of so-called balanced portfolios in 2022 when the performance, or rather underperformance, of equities and bonds tracked each other more closely.
“We all grapple with how to put portfolios together and I think diversification is very important,” Marais said.
“It is a very uncertain world and I’m not sure anyone is going to be calm through this kind of environment but…the most important thing is to try and achieve actual diversification…across sectors, countries, styles of equities so as to put together a portfolio that’s sufficiently resilient to whatever the world may throw at us.”
Marais believes the 60/40 construct maybe more relevant today than anytime in the past decade, due to the higher nominal and higher real yields on offer.
Orbis is “quite excited” about the potential for treasury-inflation protected securities, which essentially rise along with inflation plus the potential for yields of 1-3 per cent, depending on duration.
On the equities side, there is plenty of opportunity for investors willing to be “a little bit more tactical and a little bit more active,” Marais said.
“From a bottom-up perspective, if you’re willing to look deeply, look at more out of favour areas, we still think that there are attractive opportunities to be found in equities and a few interesting things [happening] on the fixed income side.”
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