In the world of asset management, growth and value styles are contrasted. Growth investors look for companies with significant earnings growth potential, while value investors look for companies that are in good shape but undervalued by the market.
Marc Fassone: What are the benefits and limitations of a value strategy in the current environment of inflation, recession risk, energy crisis and geopolitical instability?
Richard Halle: We’ve just seen a pretty profound regime change. We have lived for the last 10 to 15 years in an environment of accommodative monetary policy, high money issuance by central banks, low interest rates and low inflation--all this in a globalised world where geopolitical tensions had no impact. This led to a trendy market with lots of capital desperate to find yield all flowing into very similar areas. I think this led to a lot of distortions, most of which are now being reversed very sharply.
This change has big implications for both value and growth managers.
Traditional value sectors have been ignored, leading to underinvestment and therefore stress and even shortages, such as in the oil, gas, mining, steel, cement and semiconductor industries, sectors that have been offshored. Or in food retailing, where shop openings, previously very dynamic, have come to a sudden halt. It’s a rediscovery.
How are you adapting to this new paradigm?
With the return of geopolitics, stock pickers like me have to be aware that the world is fracturing.
Secondly, in a changing world, the companies that will stand out in the next 10 years will not be the companies that have stood out in the last 10 to 15 years.
During that time, the main task of a fund selector was to watch and find the best growth manager they could find. This worked every time. So much so that value management was marginalised.
Today, this style is back in the limelight.
Last year, the value strategy achieved its best performance in 40 years. Some of our clients ask us whether this is not a parenthesis that is about to close, and whether we should not give up our profits and return to the growth strategy that has worked so well in recent years. We don’t think that’s the case because there are still a lot of opportunities. And also because this strategy has always performed well. At least until the central banks switched to these ridiculous accommodative monetary policies. This decade will be the decade of cheap assets.
The banking system in general, in almost all countries, is in very good shape.
Which sectors do you favour and which do you avoid at all costs?
As a value manager, the approach is normally to invest in as many sectors as possible. With two exceptions.
The first sector I avoid at all costs is real estate. We don’t have real estate in our funds because we believe that most companies in this sector have balance sheets that only make sense in a world of zero interest. They have too much debt and too many assets, so valuation becomes complicated. Refinancing them in the current environment will be very difficult.
The other sector we are not invested in is luxury goods. Not because the outlook is bad--with the reopening of China, it should even improve--but because valuations are too high. Value managers like to buy at the best price. We think there are some very interesting consumer stocks that are not luxury goods.
On the European continent, are there any countries that you also avoid?
Switzerland. Not because the companies there are doing badly, but because the companies there are very well run, so it’s hard for us to find good deals.
The beauty of being a value investor is that different opportunities arise in different countries. We are still avoiding Italy and particularly its banking sector. The Italian public debt problem as a whole makes it difficult to invest in banks. That’s why we don’t have any holdings in financial institutions [in Italy].
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You talked about the level of Italian public debt. Do you think that Europe is facing a debt problem?
Yes, without hesitation.
Could this be a big problem for the European economy?
For a manager, there are many questions about public debt. If the [European Central Bank] stops its quantitative easing policy and no longer buys these government bonds, who will be able to replace it? Who will buy them and at what price? In the event of a crisis, will the [European Commission’s] anti-fragmentation tool work? These are questions that we must ask ourselves.
Fortunately, we think that the banking system in general, in almost all countries, is in very good shape, which helps. Also, households seem to be maintaining their level of consumption. And companies have healthy balance sheets.
Structural change is the enemy of value investing. What we like is cyclical change.
Which stocks do you favour? What are your criteria?
I mentioned this at the beginning of our interview: one thing that is very important for fund managers is to focus on companies with strong balance sheets.
Beyond that, the value manager does not like structural change. Structural change is the enemy of value investing. What we like is cyclical change. A big part of our job is to determine whether a change is structural or cyclical in nature, which is difficult. We like to buy companies where it’s not obvious that they’re going to perform well over the next 18 months. It may sound odd, but we don’t worry about that. We are looking for our 5-year risk premium. To do that, it is important to start with a strong balance sheet.
How do you feel about the strong rally in European equity markets in recent weeks? Is this a surprise for you? Will it last?
This rebound is not a surprise to me. In the second half of last year, the market was very nervous about the risk of a global recession and Europe’s vulnerability to war and the energy crisis. This concern was reflected in the flow of investment funds and in share prices. Europe had become very cheap. With the worries dissipating, the current rally is not a surprise. And I think it will last because the European market is still very cheap, especially compared to the US.
Can we apply this analysis to the euro?
Without being an expert on the foreign exchange market, I think that the current rise of the European currency against the dollar brings it back to where it should be. And that the movement is linked to the easing of the energy market, particularly gas.
This article was published for the Paperjam+Delano Finance newsletter, the weekly source for financial news in Luxembourg. . Read the original French version of this interview on the site.