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Inside the Market For this month at least, value investors are putting hedge fund pros to shame

Scott Barlow, Globe Investor’s in-house market strategist, writes exclusively for our subscribers at Inside the Market.

The stocks most widely held by global hedge funds took a serious beating during the latest market swoon in what potentially represents a major shift in sectors that have been leading the equity indexes higher.

Growth stocks such as the high-growth, high-valuation FAANG equities (Facebook Inc., Amazon.com Inc., Apple Inc., Netflix Inc. and Google parent Alphabet Inc.) have for years now outperformed the more attractively priced equities preferred by value investors. That definitely hasn’t been the case this month, and the reversal of the long-held trend was on display again Monday when the tech sector led declines in the S&P 500.

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Goldman Sachs strategist David Kostin has compiled an index of stocks most popular with global hedge funds. It is available to investors through the Goldman Sachs Hedge Fund VIP Index ETF (GVIP-NYSE Arca). Performance for the top 10 holdings is shown in the table below and returns for the exchange-traded fund as a whole are highlighted in the chart.

The ETF fell 2.5 per cent last week. The table identifies Autodesk Inc., down 9.1 per cent, and Worldpay Inc., weaker by 4.7 per cent, as the main culprits behind the portfolio’s price weakness.

This downdraft in hedge fund top holdings coincided with an abrupt change in trend for the performance of value versus growth stocks. Merrill Lynch chief quantitative strategist Savita Subramanian wrote in a note that, so far in October, “Growth factors proved one of the weakest links with a 7.2-per-cent decline (on average), lagging Value by 0.8 per cent. Growth vs. Value also saw the biggest week-over-week reversal in nearly a decade, as Russell 1000 Value outperformed Growth by 2.4 percentage points in the week of Oct 1.”

One week of market data is not enough to call a sustainable change in trend. There has, however, been an increase in prominent market forecasters recommending investors adopt a value-investing approach for at least part of their portfolio.

Among them is Morgan Stanley’s U.K.-based chief cross asset strategist Andrew Sheets. He notes that as of early last week, value globally had not been as cheap relative to growth in nearly 20 years. Mr. Sheets expects that slowing global economic growth, tighter central bank monetary policy and rising inflation will cause a rebound for value stocks.

As for individual market sectors, Mr. Sheets sees value opportunity in global energy and European stocks.

It might be a bit early for the wholesale adoption of a value-based investing strategy. Outside of last week, performance data show that it has dramatically underperformed throughout the postcrisis era. But at a time when interest rates are creating an entirely different, less risk-friendly market backdrop, the downside protection offered by lower valuation stocks could soon prove a plausible and attractive option for investors.

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GVIP US Equity

Security name Symbol 1W Rtn (%) 1M Rtn. (%) 3M Rtn. (%) YTD Rtn. (%) 12M Rtn. (%)
GS Hedge Fund VIP Index ETF GVIP-A -2.5 -3.8 -3.6 4.8 6.7
Express Scripts Holding Co. ESRX-Q -1.8 4.8 15.5 26.3 63.5
Apple Inc. AAPL-Q -1.0 0.5 16.7 32.8 44.5
T-Mobile US Inc. TMUS-Q -0.3 0.7 11.0 7.7 11.6
Autodesk Inc. ADSK-Q -9.1 -8.4 0.5 31.8 16.1
Iqvia Holdings Inc. IQV-N -2.3 -0.3 16.7 27.5 26.8
Anthem Inc. ANTM-N -1.6 1.9 8.6 21.7 44.8
Worldpay Inc. WP-N -4.7 -4.9 9.6 29.0 34.8
Aetna Inc. AET-N -1.3 -1.2 5.5 12.4 31.2
Cheniere Energy Inc. LNG-A -2.9 -1.8 3.4 20.1 38.2
Constellation Brands Inc. STZ-N 1.1 4.5 4.1 -0.3 10.1

Source: Bloomberg

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