The increasing likelihood of an inflationary environment, the hefty performance gap between growth and value stocks and a widespread style drift towards tech names from fund managers means shunning value funds is "a dangerous way to put all of your eggs in one basket," according to BMO GAM's Paul Green.
Green, who is a portfolio manager on the multi-manager team at the firm, said there are numerous signs that both retail and professional investors are "throwing in the towel when it comes to value funds" in the belief that "the only way you can make money is by buying what has worked in the past".
He said: "The S&P 500 Growth and Value indices are showing their largest gap in performance for 25 years, while tech stocks account for 30% of the S&P 500 currently, which is a 20-year high. This even excludes Amazon, because it isn't classed as a tech stock.
"On the flipside, financials and industrials are at 20-year lows [as positions within the index]. We have seen some tech funds - such as Polar Capital's Global Technology fund - soft close because they have seen such massive inflows, while 10,000 day traders are buying shares in Tesla each day.
"It is those highly exciting, high-growth names that float every ten years or so that everyone is rushing towards, while nobody is looking at value. It has not worked for a while and everyone is buying what has already worked."
Growth's prolonged outperformance
Green explained that there are three key reasons growth stocks have outperformed their value counterparts over the last decade.
Firstly, he pointed out that the global economy has had a lacklustre growth rate while inflation and interest rates have also remained low, driving investors to buy into both "bond proxy"-style quality growth compounders and high-growth tech names in a bid to chase some market upside.
Secondly, he said growth has been popular because of the significant disruption the technology sector has seen over the last decade, which has driven their outperformance relative to other more value-oriented sectors.
Finally, he said growth stocks have proven more popular simply because there are more of them available than their value counterparts.
"According to our data, over a 45-year period until the Global Financial Crisis, value outperformed growth most of the time. Then we get to the GFC, and we can see that growth took over," Green explained.
"Over that period value has underperformed by 46%, which compounded out, is 5% per year. That is a pretty meaningful underperformance - and that is only up to the end of 2019. It is probably worse year to date.
"Value investing, in a nutshell, is finding securities that appear cheap relative to some fundamental measure, and that could be on its earnings-per-share or its book value. It sounds like a very sensible starting point, but there can be periods in time where that gets disrupted by what is going on either at the macro and micro level, such as low levels of growth and inflation."