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Value or growth? Quality is the key

Marketing Communication

Authors: Jean David Meloche, Montrusco Bolton, Kurt Kara, Maj Invest


20. June 2022

  • Retail funds
  • Institutional investors
Jean David Meloche, Montrusco Bolton Investments, Photo: Image Salon; Kurt Kara, Maj Invest, Photo: Maj Invest

Is the growth outperformance set to continue? Or will value stocks stage a comeback this year? Oliver Fischer, Head of Fund Distribution at Universal Investment, talks to Kurt Kara from Danish value fund boutique Maj Invest and Jean David Meloche from growth specialist Montrusco Bolton Investments. The portfolio managers also discuss the threat of persistent inflation, why quality is paramount and why, despite their different approaches, they both invest in Meta.

Oliver Fischer Oliver Fischer, Head of Fund Distribution, Universal Investment              Photo: Alex Habermehl, Source: Universal Investment Photograph: Alex Habermehl Source: Universal Investment

Mr Kara, would you please start by explaining your investment approach?
Kurt Kara: We are value investors. That is the backbone of our investment approach. Basically, we are cautious and we want to avoid capital losses. For us, volatility does not mean risk. Risks, in our view, are permanent losses of capital and unfavourably-structured portfolios resulting from poorly-selected stocks. Therefore we believe it is crucial to select promising companies based on strong fundamental data for our Maj Invest Funds – Maj Invest Global Value Equities (ISIN LU1321539576 ( I EUR)). We are pure stock pickers with a bottom-up approach. Although we are value investors, we do not just focus on buying as cheaply as possible. We need to find the appropriate quality for our investment because without that, we risk making a capital loss.

Montrusco Bolton, meanwhile, is a Canadian fund boutique that focuses on growth stocks. And yet, the investments show certain similarities. What is your view on this, Mr Meloche?
Jean David Meloche: Correct. Our UI I – Montrusco Bolton Global Equity Fund (ISIN LU2361251064 (EUR IX A) is a highly-concentrated portfolio comprising about 35 stocks, chosen through a fundamental bottom approach with a marked growth bias. The quality of the companies is paramount for us. In this respect, there are some similarities between our investment philosophies.

For many years, the world of investments has largely focused on growth rather than on companies’ fundamentals. Do you see this as problematic?
Kurt Kara: Yes, it is problematic. You could say that people are no longer betting on the horse but on the jockey’s colours, the condition of the racetrack or even the weather. There is less and less talk about the companies and their key figures. Companies’ fundamentals are becoming less and less important.

The whole market needs to become more rational again.
Kurt Kara
It is the stock picking ability that has generated our excess return, not factor allocation!
Jean David Meloche

For this reason, growth stocks have outperformed value stocks in the past decade. Will this continue?

Jean David Meloche: Growth bias outperformance has certainly been challenged through recent interest rate and inflation developments. Companies we invest in have continued to outperform due to business model robustness and high quality standards - and we are happy to pay a premium for these factors. Nevertheless, when thinking about future excess return, we want to set aside such terms as growth, value or quality. It is the stock picking ability that has generated our excess return, not factor allocation! We generate added value for our portfolio and our investors through a rigorous investment process focusing on business risks and market psychology where we hold competitive advantages, allowing us to select strong, and misunderstood business models. The quality of the companies is the most crucial aspect, irrespective of whether they fall into the value or growth category. As active investment companies, both Maj Invest and Montrusco Bolton can only profit from such a development.

Kurt Kara: Definitely! The whole market needs to become more rational again. This new rationality may well boost undervalued value stocks. A stronger focus on fundamentals could actually be positive for us stock pickers. However, both of us are actually growth investors. The difference between us is that Jean David looks for growth in the future and I focus more on the present. But for both of us, the fundamentals of the companies are decisive. The crazy nature of the market can be clearly seen in Apple’s shares, which currently account for almost five percent of the MSCI World, while Japan only accounts for six percent.

What is important in the current environment is therefore the quality of the company and, specifically, whether it has pricing power.
Jean David Meloche
But for both of us, the fundamentals of the companies are decisive.
Kurt Kara

The market situation has also changed a lot in recent years. Interest rates are extremely low. That is a positive environment for growth, isn't it?

Jean David Meloche: I do not agree - at least not in the current environment. Although we still have low interest rates, we have also got high inflation. We are thus not the only ones who expect rising interest rates due to persistently high inflation worldwide. What is important in the current environment is therefore the quality of the company and, specifically, whether it has pricing power.

Kurt Kara: Absolutely! If a company, does not have pricing power, then the coming years are going to be difficult. We also expect inflation to remain high and interest rates to rise. There is no way out of high global debt without inflation. And it is precisely this inflation that I want to protect our portfolios from by investing in high-quality equities.

Another common feature in both your approaches is your allocation in Meta shares, which actually have been hit heavily at the beginning of the year. Why is the share interesting?

Jean David Meloche: We see a lot of growth potential in Meta - first and foremost in advertising revenue. Meta is very well positioned overall, across its various channels, and has an enormous audience. Moreover, the metaverse’s potential is far from priced in.

Kurt Kara: I completely agree. Above all, the discussion surrounding the metaverse will be a big driver in the future and a real game changer. And it is precisely this growth path that has not been properly priced in yet. We therefore believe Meta is a high-quality company that has until now been valued relatively cheaply.

universal spotlight

Further interesting topics for institutional investors, fund initiators and asset managers can be found in universal spotlight, the magazine for the investment market. 
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