Ignis UK Focus Fund manager Ralph Brook-Fox is selectively adding value stocks to his growth portfolio on his view that, dotcom boom aside, growth companies now look expensive relative to history.
Brook-Fox, whose fund has returned 1st quartile performance over one, three and five years*, says that, while his portfolio retains a strong bias towards high growth companies, the widening valuation gap between growth and value¹ has encouraged him to seek tactical opportunities in the latter segment of the market.
“We continue to have a strategic preference for companies able to deliver growth in an environment where this attribute is increasingly hard to come by,” he says. “But growth has already had a good run and there may be scope for profit taking, as well as opportunities in the value segment, particularly as dividends are going to look increasingly attractive given sustained low interest rates, very low long bond yields, and the loss of the BP dividend.”
Value companies Brook-Fox has recently added to his portfolio include AstraZeneca, GlaxoSmithKline and British American Tobacco. Of the purchase of the latter two, Brook-Fox says: “Glaxo’s high yield and low PE coupled with its defensive attributes are increasingly attractive given heightened macro economic uncertainty, whilst BAT offers emerging market exposure plus a decent dividend, and is considerably cheaper than many other global consumer staple stocks.”
Despite his tactical move into value, Brook-Fox believes growth companies are, on the whole, better placed to overcome the challenging economic environment. “Macroeconomic indicators are mixed and rolling over, and the strong earnings momentum that has boosted the market is going to fade,” he says. “Eurozone concerns are not going to be resolved quickly, despite the stress tests, and volatility is likely to remain a feature of markets. Defensive stocks with value characteristics are one way of playing difficult conditions, but companies able to demonstrate structural growth should generally be better placed to weather these headwinds.”
*Source:Lipper, bid to bid, net income reinvested to 30/06/10 or to end June for each year, including initial charge.
Value stocks as measured by the FTSE350 Higher Yield index are currently trading at 11.1x, a 23% discount to the 10-year weekly median of 14.3x. This compares with growth stocks with a trailing PE of 18.9x, a 10% premium to their 10-year weekly median of 17.2x. (Source: Datastream).