# Time to reappraise the ‘value’ approach?

- Link: https://www.directorstalkinterviews.com/time-to-reappraise-the-%e2%80%98value%e2%80%99-approach/4121062103
- Published: 2022-04-25T14:20:08+01:00
- Author: Amilia Stone

**After a tough decade, the environment for the value approach is improving, says
Lisa Yang, Co-Manager of the [BlackRock Sustainable American Income Trust plc](https://www.directorstalkinterviews.com/company/blackrock-north-american-income-trust-plc/brsa.l).
Is it time for investors to take note?**

**Capital at risk.** The value of investments and the income from them can fall 
as well as rise and are not guaranteed. Investors may not get back the amount originally
invested.

It has been a difficult decade for the ‘value’ approach to investing, but this may
be about to change. There are clear shifts in the inflation and interest rate environment,
which should favour value, while the value approach still has a clear advantage 
on valuation. However, we would argue there are other reasons to look at value today–
from balancing ESG (Environmental, Social and Governance) exposure to its diversity.

The first reason to reappraise the value approach is simply the valuation argument.
Value always trades at a discount to growth, but that elastic has been stretched.
Now the gap between the valuations of growth and value stocks is at historic highs,
even after the recent bounce back for certain value sectors such as energy.

This coincides with a change in the interest rate regime. Our view is that inflation
is likely to persist, given the situation in Ukraine and the supply chain bottlenecks
that are a legacy of the Covid pandemic.  Higher food and energy prices are likely
to be around for a little while longer. The US Federal Reserve has not wavered on
rate rises despite the rising cost of living, recognising the need to tackle inflation,
and is still forecasting at least six rate rises for the year ahead.

In general, this is a far more favourable environment for value investors. Looking
at the 80–100-year history of value versus growth, value tends to do best is in 
periods of higher and rising rates and higher and rising inflation. This is the 
regime likely to prevail for the foreseeable future.

**The ESG angle**

However, there are other, less obvious reasons to turn to value today. The past 
few years and the strong performance of growth stocks have left many investors with
portfolios that are pointed in one direction. It may be a particular problem for
ESG investors. The vast majority of sustainable ESG funds are growth oriented. This
growth skew could be a looming risk for sustainable investors.

As such, there is an important place for a value ESG fund within a portfolio. There
are relatively few funds that fulfil this brief and value investing continues to
be seen as focused on old-fashioned, carbon-intensive industries with little to 
tempt a sustainable investor. In reality, value and ESG investing are not incompatible
and bringing in an ESG lens can help reduce the volatility associated with ESG investing.

This Trust seeks to have a stronger ESG score than the MSCI benchmark, while excluding
some harmful sectors, such as controversial weapons or thermal coal. We also look
to ensure that this portfolio has a higher score based on Scope 1, 2 and 3 greenhouse
gas emissions.

In general, we would rather work with companies to improve their practices. In the
energy sector, for example, not all companies are equal. When it comes to carbon
reduction and future proofing their business, some companies have their head buried
in the sand, but other companies are playing a vital role in the transition to clean
energy. There are a lot of companies using the cash flows from energy production
to invest in greener options. We need to provide them with the capital to make that
change.

**Diversity of opportunity**

A final reason to consider value is that it is a far more diverse approach than 
investors have come to believe. The BlackRock Sustainable American Income Trust 
strives for balance and resilience, and we have no problems creating this within
a value portfolio. We can find opportunities amid relatively cyclical sectors, such
as energy, alongside more stable sectors, such as healthcare.  

Perhaps surprisingly, technology is our largest relative weight. Technology stocks
are becoming the new staples. Just like healthcare, people cannot shut off or stop
buying technology just because the economy is in recession. On the flip side, the
Trust also has a significant weight to consumer discretionary stocks. The US consumer
is in good health, a very different position from its situation during the global
financial crisis. House prices are rising, at the same time as income and wages,
which should help support spending.

We’re excited by the outlook for value stocks. Over the long term, value outperforms,
but the last 10 years or so, in the wake of the global financial crisis, have been
very tough for value investors. That’s an anomaly in history and has left value 
stocks on a significant discount. We’re now in a real regime change and there’s 
a lot of stored value in those value stocks. To our mind, the rotation that we’ve
seen towards value stocks is only just getting started.

**Click here to learn more about [BlackRock Sustainable American Income Trust plc](https://www.blackrock.com/uk/solutions/investment-trusts/our-range/blackrock-sustainable-american-income-investment-trust/trust-information?siteEntryPassthrough=true&cid=aff:investmenttrusts2022:brsa:directorstalk:link)**

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ID: MKTGH0422E/S-2159431

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