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Some modest victories for value in 2021

By 1 January 2022August 7th, 2022Commentary4 min read
  • Value investing posted some modest victories in 2021.
  • Whilst growth outperformed at the index level, the outperformance was narrow, propelled by a handful of large cap companies.
  • Down the market cap scale value mostly outperformed – a notable divergence that may signal further improvements for low priced securities in 2022.

2021 saw broad based returns in European equities, but with some concentration of returns at the top. ASML, Novo Nordisk, Nestle, Roche and LVMH – all relatively expensive growth companies – were the top 5 contributors – providing 30% of the benchmark return. In the S&P, the story was similar with the top 5 of Apple, Microsoft, Nvidia, Alphabet and Tesla providing 33% of the benchmark return.

These expensive large stocks helped growth outperform value within large caps, but by a smaller amount than might be expected – by 7% in Europe and just 3% in the US.


EU Large Cap Value – EU Large Cap Growth
FY 2021

US Large Cap Value – US Large Cap Growth
FY 2021

In mid caps value performed better. In Europe, mid cap value underperformed mid cap growth narrowly. In the US, mid cap value outperformed by over 11%.


EU Mid Cap Value – EU Mid Cap Growth
FY 2021


US Mid Cap Value – US Mid Cap Growth
FY 2021

In small caps the story was stronger still for value. In Europe, small cap value outperformed small cap growth by 1.7%. In the US small cap value outperformed by over 14%.


EU Small Cap Value
EU Small Cap Growth FY 2021


US Small Cap Value
US Small Cap Growth FY 2021

There is a possibility that value’s stronger performance down the market cap scale may be leading a turn in large caps. The last major turning point for value vs growth was in 2007-2008. Value had had a strong run from 2000 – 2007, outperforming growth by 95%. Whilst at the large cap level, value turned down during 2007, in small caps, value’s relative performance started to weaken during 2005 – 2006. Small caps were able to provide a “heads-up” about a future turn in large caps. There is no guaranteeing this signal will apply this time, but today small caps tend to be less exposed to retail investor and momentum flows, and so this divergence of performance in small caps merits attention.

As we have noted in a prior note, aggressive growth also underperformed in 2021. The Ark Innovation Fund and the Goldman Sachs Non-Profitable Tech Basket underperformed the S&P by over 50%. When the most levered or aggressive approaches within a particular investment style struggle, this can also provide an early signal about future returns for the style as a whole.

None of these observations ensure stronger performance for lower priced value securities in 2022. However, turning points are often associated with a narrowing of breadth as leaders start to become laggards, and vice versa. Expensive growth securities have performed strongly for a decade with strong breadth across geographies and across the market cap scale. This was not the case in 2021. Only a handful of large cap growth companies propelled growth’s outperformance. These divergences ought to moderate enthusiasm for expensive securities in 2022.

The opportunity cost of owning a value fund is declining. Investors are forfeiting very little in return, enjoying a higher yield and are protecting themselves from one of the central risks to equity markets this decade – multiple compression.

The LF Lightman European Fund returned 17.2% in 2021 in GBP, narrowly outperforming the benchmark and outperforming the European value index by a larger margin.


LF Lightman European vs Benchmark & Value Benchmark

We remain optimistic about the absolute and relative returns for the LF Lightman European Fund in 2022. The Fund has a median 2022 PE ratio of 9.01, a price to sales ratio of 0.96 and a price to book ratio of 1.04. We expect a median earnings growth of our holdings of 5% – 10% in both 2022 and 2023. The expected gross dividend yield of the fund is 4.5% in 2022 and 4.7% in 2023. The balance sheet of the portfolio has never been stronger, with 82% of our non-financial holdings at net cash or with net debt to ebitda of less than 1x. This sets the scene for strong buy backs boosting returns on top of earnings growth in the coming years.

MSCI, Bloomberg, Lightman Jan 2022.