27th June 2025
Last week we highlighted the stealth outperformance of UK equities versus the dominant US with the former 3% ahead of the latter in local currency terms since November 2020 (Vaccine Monday). In this blog we turn to the equally underappreciated resurgence of value as an investment style. That value has actually been doing quite well in lots of places has perhaps slipped under the radar due to index level movements where over the past 3 and 5 years MSCI World Growth has outstripped MSCI World Value by 34% and 13% respectively.
Closer scrutiny shows growth’s superior performance to be a uniquely US phenomenon, however, and one that muddies the picture at the global level owing to the US market’s heavy weight in the index (c.70%), as well as its significant skew to growth stocks. Taking a more granular look at individual markets reveals a counter trend with value materially outperforming growth in the UK, Europe, Japan and emerging markets. Over the past 5 years value is ahead by 42%, 44%, 54% and 24% respectively. The notion that value might do better in a world of higher interest rates and more volatile inflation has empirical evidence on its side, as well as logic given the longer duration nature of growth stocks and the impact of higher discount rates used in equity valuation models.
Why this trend has not applied in the US (MSCI USA Growth +42% ahead of MSCI US Value over 5 years) might be explained by the all-pervasive AI narrative which has primarily benefited a handful of mega-cap growth stocks which in turn explain an unhealthy proportion of the US market’s overall returns. The fact that MSCI US Small Value has outperformed its growth equivalent corroborates this theory and hints at a crowding out effect which has not been present in other regions owing to less concentrated markets and lower exposure to AI trades and the technology sector in general. Whether or not the frothy valuations and massive capex of perceived US AI beneficiaries justify the hype only time will tell, but we’re very conscious that any reversal in fortunes here will likely prove a mighty headwind for US index level performance as well as a probable rotation in style leadership.
At Hawksmoor we are valuation informed investors, but we have no structural bias in terms of style and typically like to interrogate valuations and margin of safety at the individual portfolio level rather than making sweeping statements about value and growth. Similarly, we don’t like to pigeonhole funds or fund managers into an explicit style bucket, recognising that value and growth are in reality two sides of the same coin. That said, in recent years our Funds have had a noticeable skew towards value which largely reflects the evolution of relative valuations. Of course growth portfolios and those with superior quality metrics (profitability, leverage, earnings visibility) should trade at a premium to the more cyclical names or duller sectors that tend to dominate value indices, but in the 5 years prior to the 2022 market rotation, the valuation differential between growth and value widened to extreme levels. In the UK, growth’s 20% valuation premium in 2017 widened to around 140% towards the end of 2021, several standard deviations above the long-term average. Decomposing the makeup of returns is informative showing that the vast majority of growth’s outperformance over that period was due to significantly more pronounced multiple expansion. Indeed, value is not a million miles behind growth in terms of fundamental performance, namely that driven by dividends and earnings growth.
The more recent outperformance of value everywhere but in the US has seen the valuation discount to growth compress somewhat, but it remains wide in a historical context. This is reflected in our conversations with individual fund managers where those with a value bent are far more inclined to report current portfolio valuation metrics that look cheap relative to their own history.
Unusually, UK and European value funds have continued to see outflows despite the strong performance, which we suspect is again related to the crowding out effect of the AI / Mag 7 trade as well as the relentless move by many investors towards benchmark aware and therefore US heavy weightings. Our main takeaway from the analysis is that there are alternative ways of making money beyond chasing a well-established and fully priced narrative and that it’s possible to do this whilst taking considerably less valuation and concentration risk. We have significant exposure to UK, Japanese, European and Asian value strategies in our Funds which have helped explain our strong and differentiated performance. The fact that value’s outperformance has gone relatively unnoticed is reflected in relative valuations where value’s discount to growth remains historically wide, leaving us confident that the trade has further to run.
Ben Mackie – Senior Fund Manager
For professional advisers only. This article is issued by Hawksmoor Fund Managers which is a trading name of Hawksmoor Investment Management (“Hawksmoor”). Hawksmoor is authorised and regulated by the Financial Conduct Authority. Hawksmoor’s registered office is 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. Company Number: 6307442. This document does not constitute an offer or invitation to any person, nor should its content be interpreted as investment or tax advice for which you should consult your financial adviser and/or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. Any opinion expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. FPC25436.
