vertical integration

Market briefing – 10th June 2020

The hospitality and travel industries, together with general retailers tend to employ large workforces on relatively modest wages. These sectors have been among the worst affected during lockdown caused by the Covid-19 pandemic. However, this health and economic crisis is likely to have a far-reaching impact on broader society.

When considering the recent events in Minneapolis and beyond, the US President appears to be insensitive to the current situation, whilst opposition voices, such as the Democrats’ presidential candidate, may now be seen as the candidate of change. UK politicians have also been slow to react. Labour politicians criticised the Conservatives handling of events and the Conservatives reminded their Labour opponents that the felling of a statue of an infamous slave owner in Bristol, occurred under a Labour controlled council.

All these events, perhaps, suggest a watershed moment, particularly if political events follow the course that many suspect they will. This in turn could have pronounced implications for investment.(1)

Putting value back into investing

Value investing has received some ‘bad press’ over the years. Similar to the debate between active management and passive investing, where emotions can cloud the benefits and detriments of both, value investing (in contrast to its investment philosophy ‘alter ego’, growth investing) has had some unfair, and sometimes fair, criticism. This isn’t new, but an understanding of value investing can help to broaden investors’ minds and assist in a more balanced and rounded investment view. A broader view is essential in managing emotions often stirred up by some of the extreme market turbulence we are experiencing.

What is ‘value investing’?

“Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their [fair or true] value. Value investors actively ferret out stocks they think the stock market is underestimating. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond to a company’s long-term fundamentals. The overreaction offers an opportunity to profit by buying stocks at discounted prices…” (2)

What the above definition means is that fund managers who classify themselves as ‘value investors’ are looking for investment bargains, i.e. stocks that are unloved and have a share price lower than the real value of their business.

By buying the stock at a bargain, or cheap price, the returns potentially gained are significant, especially the growth that can occur between the purchase of the stock and when it rises to its perceived fair, or true value.

However, in recent years value investing has had some criticism as a suitable philosophy for investors.

That said, one of the most famous value investors is Warren Buffett, who himself was a protégé of Benjamin Graham.

How has value investing behaved?

All stocks – both those in ‘growth’ or ‘value’ camps – were significantly affected when the markets tumbled into a bear market at the end of February. Those invested in value stocks at the start of the Covid-19 pandemic had a difficult time; for the time between 21st February and – what appears to be the bear market bottom – 23rd March 2020, both US and UK value stocks saw circa -40% losses (3).

However, since 23rd March 2020, value stocks have looked cheap relative to everything else and have likely benefitted from the trillions of dollars and the billions of pounds pumped into the US and British economies respectively. If ever there were conditions for the value investing philosophy to work, it would likely be now. As ever, there are no guarantees or certainties in investing.

So, how has value investing faired since the bottom of the market? Looking at the graph below, and as always, past performance should never be used as guide to future returns, using the FTSE 100 (4) to represent growth stocks, and the FTSE 250(5) to represent value stocks…

… £10,000 invested in the value stock index of the FTSE 250 on 23rd March 2020 would now be worth £13,909 – a 39.10% increase. Significantly more than the predominantly growth stocks of the FTSE 100 with a 30.05% increase, and recovering virtually all losses suffered in the bear market between 21st February and 23rd March.

In terms of the US, looking at the graph below where the S&P 500(7) (as represented by the Invesco S&P 500 UCITS ETF tracker) is compared against the S&P 500’s value stocks i.e. without the technology growth stocks of Amazon, Google etc., within top ten holdings (as represented by the Invesco S&P 500 Pure Value ETF tracker).

It’s clear to see how value stocks have risen. £10,000 invested into the Invesco Pure Value tracker on 23rd March 2020 would now be sitting at £15,011; a 50.11% increase. Significantly more than the growth stocks of the S&P 500 at 31.27%, and recovering all the losses in the bear market; in fact, ending up moving into positive return territory.

What should this tell you?

That investors should continue to keep calm and diversify, not only across different asset types (i.e. bonds as well as equities, etc.) but also investment styles (i.e. active management and passive investing) and across investment philosophies (i.e. growth and value).

While individual stock markets will continue to go up and down, smart diversification across assets, styles and philosophies can help investors minimise their risks. Although it does not guarantee against loss, full diversification is the most important component of reaching long-range financial goals while minimising risk.

However, remember that no matter how diversified a portfolio across asset types, investment styles and philosophies, risk and reward do typically go hand in hand and as such risk can never be eliminated completely.

It is true that the short-term horizons and focus discussed enhance the uncertainty due to the unpredictability of this current situation. However, it is important to remember that we very often have a long-term investment time horizon.

As we have said before, we will continue to monitor the current financial situation and keep you notified of any changes that are made. Please seek professional financial advice if you wish to discuss your financial situation further.



(1) Based on information supplied by Square Mile Investment Consulting and Research Limited.

(2) Investopedia

(3) The UK FTSE 250 suffered a -39.79% fall, with the S&P 500 Pure Value tracker falling by -42.14% – FE Analytics.

(4) The FTSE 100 (Footsie) is an index that tracks the 100 largest public companies by market capitalisation that trade on the London Stock Exchange (LSE). The FTSE 100 represents roughly 80 percent of the LSE’s market capitalisation. FTSE is an acronym for the Financial Times and the LSE, its original parent companies. The FTSE is now owned and maintained by the LSE. It has similar importance in London to the U.S. Dow Jones Industrial Average and S&P 500 and is a major indicator of the performance of the broader market – Investopedia.

(5) The FTSE 250 … is a stock market index which tracks the largest 250 companies listed on the London Stock Exchange, after those in the FTSE 100. Many fund managers feel the FTSE 250 Index is a better indicator of the performance of the UK market, because more of the companies included it in derive the bulk of their revenues from business done in the UK. The companies included in the FTSE 250 will be the 101st to 350th largest companies listed on the London Stock Exchange – https://www.thearmchairtrader.com/markets/ftse-250-index/

(6) FE Analytics

(7) The S&P 500 or Standard & Poor’s 500 Index is a market-capitalisation-weighted index of the 500 largest U.S. publicly traded companies – Investopedia.

This publication is marketing material. It is for information purposes only. This statement is for the sole use of the recipient to whom it has been directly delivered by their Foster Denovo Partner and should not be reproduced, copied or made available to others. The information presented herein is for illustrative purposes only and does not provide sufficient information on which to make an informed investment decision. This document is not intended and should not be construed as an offer, solicitation or recommendation to buy or sell any specific investments or participate in any investment (or other) strategy. Potential investors will have sought advice concerning the suitability of any investment from their Foster Denovo Partner. Potential investors should be aware that past performance is not an indication of future performance and the value of investments and the income derived from them may fluctuate and they may not receive back the amount they originally invested. The tax treatment of investments depends on each investor’s individual circumstances and is subject to changes in tax legislation.