ETF Trends spoke with James Norungolo, Investment Specialist, U.S. Equity at T. Rowe Price to the current stance regarding growth and value, along with the approaches to both in terms of process.
As a whole, Norungolo explains how U.S. large caps are pretty balanced in the firm’s multi-asset portfolios between growth and value. Speaking to value specifically, those waiting for a broad-based mean reversion trade lifting all of Value may be disappointed.
Norungolo states, “We believe that a significant and even growing component of the S&P 500 is exposed to what we call secular disruption.” Given this, an active approach to stock picking may be the best way to avoid the more challenged businesses.
On the other hand, many growth companies benefit from these same secular themes. Still, for value, there are significant components of what the value index exposed to permanent destruction by these secular forces currently. Examples include eCommerce, Online Advertising, Streaming, Cashless Payments, Cloud Computing, and Automation.
Whether a growth or value idea, understanding these trends and gaining confidence in management teams to position their companies, within their industry, to compete or adapt to those changes, helps in building an investment case. Then, it’s a matter of determining if the valuation represents a longer-term opportunity.
Norungolo stated that the Growth Index has earned its outperformance since the Great Financial Crisis in terms of superior expansion in earnings and cash flow. Nevertheless, the massive disparity in performance and valuation has grown large enough that T. Rowe feels comfortable being neutrally positioned between the two styles today. Value is also supported by the massive global stimulus that has been deployed in response to the pandemic. Typically, such stimulus has led to a period of value outperformance.
“We think that having exposure to value before that turn makes sense, given that we’ve just seen a massive response, faster and larger than what was seen in the 2008 financial crisis.,” Norungolo adds.
Right now, on a YTD basis, about 91% of the market cap of the growth index has outperformed the value index. That’s not to suggest that growth can’t continue to outperform, but there does seem to be a setup for value to work. However, one does have to be active and selective.
Additionally, in supporting value, with the Fed’s new stance toward allowing inflation to run, combined with the inevitable fiscal package before the end of 2020 (though hard to say whether that will be pre or post-election), it’s clear there will be an effort to put forward a robust jobs recovery plan that reaches down into lower-income tiers. All of this will support higher interest rates, a steeper yield curve, higher inflation, etc., which is all supportive of value.
Being on The Right Side of Change
Regarding secular tailwinds in support of growth, Norungolo notes that T. Rowe thinks of those businesses that are “on the right side of change”, which describes growth companies such as Amazon that benefit from strong secular forces and changes in consumer preference. These forces were in place before Covid-19 and, in some cases, have been accentuated and accelerated by the pandemic.
“eCommerce has skyrocketed from the beginning of this year, as most people were stuck at home,” Norungolo notes. “We went from about 5% penetration to 11% in the course of the previous decade. In the first four months of 2020, we gained another 6%. So we had a decade’s worth of growth in about four months.”
Some of that will go back to brick and mortar as the economy continues to reopen, however, Amazon will continue to have a leading-edge, as the shift away from brick and mortar to eCommerce continues.
Other examples include the cloud, the shift from cash to cashless payments, software as a service (SaaS). There are businesses within the growth index that may appear fully valued on a near-term view, but over a longer time horizon could be creating disruptive business models and large, new addressable market opportunities. T. Rowe aims to identify those companies where the market may be underappreciating that growth potential.
T. Rowe Price currently offers four actively managed ETF strategies, which are the T. Rowe Price Blue Chip Growth ETF (TCHP), T. Rowe Price Dividend Growth ETF (TDVG), T. Rowe Price Equity Income ETF (TEQI) and T. Rowe Price Growth Stock ETF (TGRW).
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