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.
Drivers for value to outperform
However, the portfolio manager believes there are some signs that inflation - and potentially growth - will begin rising again over the medium term, which would increase the cost of capital and make growth stocks less attractive.
"While increasing the cost of capital might sound 'pie in the sky' at the moment, given central banks are doing all they can to keep borrowing costs low and encourage economic growth, there has been a change at the macro level that is at least worth considering," he said.
"Central banks have been piling money into the system via QE, but what we haven't had at the same time as that is fiscal spending. Evidence of previous regime shifts suggests that, when there is a combination of monetary and fiscal spending increasing at the same time, it leads to higher inflation.
"What we have seen now is both a huge increase in monetary supply from central banks and fiscal expansion from governments, and I think that is likely to continue because, once governments start spending, it is very difficult for them to pull back until we have established economic growth. This would be a decent catalyst for a shift between value and growth."
Additionally, Green said many industries - such as restaurants, which have reduced their capacity and been shut for several weeks - will have to begin increasing prices in a bid to protect their profit margins which, if the trend continues for a prolonged period of time, would also lead to inflation.
While the portfolio manager admitted that buying underperforming value-focused funds is "psychologically quite hard to do", he added that it is becoming more imperative to hold both value and growth funds for diversification purposes, as an increasing number of fund managers have started gravitating towards the same selection of high-growth tech names.
"We are seeing signs of professional investors throwing in the towel [on value] - whether that is through style drift, or whether it is managers such as Mark Barnett leaving Invesco, or Alastair Mundy stepping back from Investec," he said.
"In the Bank of America Merrill Lynch Fund Manager survey, they asked investors what proportion of investors think value stocks will outperform growth stocks. It is nearly at an all-time low."
In the UK, funds the BMO multi-manager team likes include Hugh Sergeant's R&M UK Recovery, Henry Dixon's Man GLG Undervalued Assets and Artemis UK Select. In the US, the team uses Lyrical US Value Equity and, in Asia Pacific, they favour Tom Naughton's Prusik Asian Equity Income fund.
"What is important to point out is that, when we have spoken about leaning towards value, these are not necessarily managers focusing on bombed out businesses," Green said.
"What we are finding is a lot of these value managers have actually managed to upgrade their portfolio by buying companies that aren't necessarily likely to fail, but have recently been oversold simply because they are not a sexy tech name dominating the market.
"It is not a major call we have positioned for across our portfolios, but everything is priced for perfection in terms of growth investing - even a slight pick-up in inflation expectations or economic growth from here would likely mean to a reversion to the mean so it is important to remain balanced."