It has been difficult the past few years to make a case for value stocks as, 2022 notwithstanding, they have been significantly outpaced by their growth peers.
According to well-known strategist, Charlie Bilello, last year, growth stocks outperformed value stocks by 30%, the second biggest outperformance on record with data stretching back as far as 1979.
Economic conditions since the global financial crisis have perfectly suited growth stocks given the combination of low interest rates and sluggish economic growth.
Value stocks tend to do better when the economy is firing on all cylinders because of cyclical industries such as energy, while they also do well when the economy is struggling due to defensive sectors like utilities.
Where they struggle is when growth is tepid, which has been the case for most of the last decade or so.
Equally, low interest rates since the global financial crisis have added to the allure of growth stocks as investors have been willing to take more duration risk.
Compounding the difficulties last year was the fact that financials struggled following the regional banking crisis in the US and the fact that investors got swept up by the AI frenzy.
However, there are signs that things may be beginning to change. The markets are now pricing in fewer rate cuts than they were at the beginning of the year, which should be a positive backdrop for value.
In addition, a lot of analysts now reckon value stocks look extraordinarily cheap.
Against this background, Isaac Poole, chief investment officer at Oreana Financial Services, chose the Fidelity America fund and the JP Morgan US Value fund for this week’s head to head.
| Fidelity | JP Morgan | |
| Size | $3.09bn | $3.2bn |
| Inception | 1990 | 2005 |
| Managers | Rosanna Burcheri, Ashish Bhardwaj | Clare Hart, Andrew Brandon, David Silberman |
| Three-year cumulative return | 19.18% | 18.72% |
| Three-year annualised return | 5.29% | 5.23% |
| Three-year annualised alpha | 1.52 | 1.57 |
| Three-year annualised volatility | 13.97 | 14.02 |
| Three-year information ratio | 0.01 | 0 |
| FE Crown fund rating | ***** | **** |
| OCF (retail share class) | 1.89% | 1.72% |
Investment approach
The Fidelity fund has a focus on quality, which means sustainable business models, strong capital structures and robust balance sheet quality.
“This is important for their value approach as they seek to avoid value traps. A central part of the approach is to invest in companies trading below intrinsic value with a good margin of safety,” said Poole.
The fund also has an ESG focus, earmarking at least half of its assets for stocks which have sustainable characteristics.
The fund also has a bias towards large-cap funds and is fairly concentrated with about 50-60 holdings.
“JP Morgan has a significantly lower active share but the process has benefited from strong stock selection and a buy-and-hold mentality that has helped over the longer run.”
isaac poole, oreana financial services
Meanwhile, the JP Morgan fund selects 85-110 companies from the large-cap universe to invest in.
“Well-run companies are those that have sound financials and capital discipline. The strategy looks for companies trading at a discount to intrinsic value,” said Poole.
Turnover in the portfolio is low and relative sector weightings versus the index are often varied to generate returns.
“JP Morgan has a significantly lower active share but the process has benefited from strong stock selection and a buy-and-hold mentality that has helped over the longer run. JP Morgan’s approach looks to be a more pure value approach but that has been challenging in the recent environment,” said Poole.
Sector allocation:
| Fidelity | JP Morgan | ||
| Industrials | 18% | Financials | 26% |
| Financials | 13.6% | Healthcare | 15.4% |
| Healthcare | 12.8% | Industrials | 12.8% |
| Consumer Staples | 12.5% | Energy | 9% |
| Communication Services | 12.5% | Information Technology | 8.7% |
| Information Technology | 9.8% | Consumer Discretionary | 7.3% |
| Energy | 8.1% | Materials | 5.9% |
| Utilities | 4.4% | Consumer Staples | 4.7% |
| Materials | 3.4% | Communication Services | 4.7% |
| Real Estate | 1.6% | Utilities | 4.3% |
| Consumer Discretionary | 1.2% | Real Estate | 1.1% |
| Cash | 0.1% |
Top five holdings:
| Fidelity | JP Morgan | ||
| Alphabet | 4.9% | Wells Fargo | 3.2% |
| Wells Fargo | 4.6% | ConocoPhillips | 3.1% |
| Evelance Health | 4.1% | Chevron | 2.8% |
| Berkshire Hathaway | 3.9% | Bank of America | 2.4% |
| McKesson Corp | 3.8% | CSX | 2.3% |
Performance
The Fidelity fund is benchmarked against the S&P 500, which is obviously a difficult benchmark for a value fund to beat, although Poole notes that overall its performance has been strong.
It had a particularly strong year in 2022 thanks to its exposure to healthcare and energy stocks, although it missed out on a lot of the subsequent mega-cap tech rally.
“Even so, the strategy has had relatively low volatility measured by standard deviation and max drawdown, which are both favourable outcomes for a value manager,” said Poole.
Meanwhile, Poole notes that the JP Morgan fund has performed well compared with its peers and also a value benchmark over the long run, driven by ample stock selection in energy, materials and industry.
“While this is a large-value focused fund, the strategy has tended to perform well in bull markets relative to other value strategies, but has market-like volatility on downside movements.”
isaac poole, oreana financial services
“While this is a large-value focused fund, the strategy has tended to perform well in bull markets relative to other value strategies, but has market-like volatility on downside movements,” said Poole.
Poole added that both funds generated solid returns over a three-year period.
“Value has performed well at different points over the past three years but has not kept pace with growth and mega-cap tech when the market has really run hard. Both of these strategies reflect that, with solid three-year returns, relatively low volatility and some downside protection through 2022,” said Poole.
Discrete calendar year performance
| Fund | YTD* | 2023 | 2022 | 2021 | 2020 |
| Fidelity | 4.76% | 11.5% | -5.5% | 24.22% | 3.96% |
| JP Morgan | 7% | 8.88% | -5.76% | 26.56% | 2.45% |
Manager review
The Fidelity fund underwent a changing of the guard in 2021 with the departure of Angel Agudo. It is currently being helmed by Rosanna Burcheri and Ashish Bhardwaj.
“Both are experienced managers and are supported by Fidelity’s large group of dedicated US equities analysts. Since taking over the fund, the managers have done a good job of balancing the previous manager’s style and imposing their own traits on the fund,” said Poole.
Meanwhile, the JP Morgan fund is currently led by Clare Hart, although she is due to leave later this year.
“Both are experienced managers and are supported by Fidelity’s large group of dedicated US equities analysts. Since taking over the fund, the managers have done a good job of balancing the previous manager’s style and imposing their own traits on the fund.”
isaac poole, oreana financial services
Andy Brandon and Dave Silberman have also served as listed portfolio managers since 2019.
“Both have good experience and have worked together for some time on the strategy covering different sectors. The team has some dedicated analysts but are also able to access JP Morgan’s broader analyst team,” said Poole.
Poole notes that both funds have strong teams, albeit they have either undergone or are subject to change.
“What is critical is the ability to stick to the value approach upon changes as this is a key part of the proposition. Strong analyst support and continuity in experience and people makes both of these teams in a good position over the medium term,” said Poole.
Conclusion
Poole notes that there are a lot of similarities between the two funds given their large-cap, value approach, although he mentions that the Fidelity fund is more active.
“Portfolio manager changes, both recent and upcoming, make it somewhat harder to focus on recent performance, but nonetheless these value managers have delivered what investors would hope from a value exposure,” said Poole.
Poole also notes that he is cautious on US equities given stretched valuations so value and quality tilts are important.
“JP Morgan’s ability to protect on the downside is attractive from this perspective, but Fidelity has offered solid returns recently that could persist if we are wrong on the outlook. In summary, both managers would be a strong contender for a core value exposure within a diversified portfolio,” said Poole.
