- Until the decline in mega-cap technology stocks in early August, value stocks had lagged the broader market for more than a decade.
- Fund manager Nataliya Kofman believes there are three factors which could positively influence the trajectory of value stocks from here.
- For investors holding a balanced portfolio of stocks and bonds, we see a strong case for maintaining exposure to value stocks over the long term.
Expensive growth-oriented stocks have driven the market for more than a decade against a backdrop of historically low interest rates. This environment favoured sectors like technology and biotech, where companies could capitalise on the lower cost of capital to fund long-term, innovative projects.
Growth companies investing for the future have disrupted more traditional industries and this has had an impact across the global equity market. It affected value stocks, which are typically more established companies with stable earnings, in particular.
Growth had led the market for the better part of the past year (and for much of the previous decade) until the decline in mega-cap technology stocks in early August, which saw a rotation into value (and small-cap) stocks amid a renewed focus on valuations.
Nataliya Kofman, equity portfolio manager at Wellington Management Company, an external manager relationship which Vanguard can trace back to its roots in the US in 1975, believes that there is the potential for further market volatility as investors continue to adjust to a higher interest rate environment.
However, she thinks the market has been mistakenly hanging on to the idea that legacy companies cannot compete and create value over the long run.
Uncovering opportunities in undervalued areas
During times of disruption and market uncertainty, Nataliya finds value in three key areas:
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Resilient business models
The market has not fully recognised the potential of resilient value stocks – companies within disrupted industries that have managed to adapt and strengthen their competitive position. These global franchises have developed robust business models—or battle-tested franchises—enhanced by scale, expertise and balance sheet flexibility, allowing them to invest in innovation and growth.
For example, Nataliya believes that Honda Motor Co, the Japanese carmaker, is well-positioned globally due to its strong engineering expertise, valuable brand, diversified business (cars, motorcycles and power products) and conservative balance sheet.
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Strategic growth
Increased innovation has seen companies diversify their cash flows across regions and product segments. This has led to selected companies successfully expanding their business lines. For example, Nestle, a strong consumer franchise, has evolved to focus on growth categories such as petcare (Purina) and coffee (Nespresso/Starbucks/Nescafe).
Another example is Accenture, the global technology consulting firm. Nataliya and her team believe the company is well-positioned for the long-term digital transformation given its superior positioning in cloud and security services and accelerating growth in artificial intelligence (AI)-related services as companies work to integrate new AI technologies. This is in contrast to the market's perception that Accenture will not be a strong beneficiary of AI.
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Cyclical opportunities
Value opportunities are not confined to the more traditional areas of the market. Nataliya believes that there are cyclical opportunities where the market is hesitant to engage due to fear of disruption and temporarily slower growth at the bottom of product innovation cycles. These are consumer franchises such as Unilever and Disney, industrial franchises such as Daimler Truck and Isuzu, and pharmaceutical companies such as Pfizer and AstraZeneca.
Searching for value in Europe
While technology stocks continue to dominate the US equity market, Nataliya thinks there is a lot more value to be found outside the US, based on company fundamentals. This includes European consumer stocks, as well as opportunities within the energy, transportation, utilities and financials sectors.
Nataliya is particularly interested in financials (notably banks and insurance), where current interest rates combined with improving capital positions and consolidation over the past decade are expected to lead to improving and more sustainable earnings over the coming years. Nataliya believes these earnings will also be combined with capital return to shareholders.
For example, Nataliya initiated a holding in Société Générale (SocGen) in the second quarter of 2024. In her view, the French-based multinational financial services company offered the attractive combination of a low valuation point and greater stability of earnings compared with other banks.
The assessment of company valuations is a key part of the investment process of Vanguard's active multi-asset fund range. Investing requires a long-term perspective, and we see a strong case for investors maintaining exposure to a balanced portfolio of globally diversified stocks and bonds within an active multi-asset fund.
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