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SQM Research Ratings Update
September 2020
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Value - US Market says Meh!
Rob da Silva – Head of Research

Here is the dictionary definition (from Oxford Languages) of the term ‘Meh’:
Exclamation - expressing a lack of interest or enthusiasm.
Adjective - uninspiring; unexceptional.
This is certainly descriptive of the disdainful treatment which the US market applies to value stocks.  We will look at this a bit later, but first, a quick re-visit of last month’s analysis of value vs. growth funds in Australia.
As a reminder, we found that during the COVID market meltdown, growth outperformed value in both the downside and recovery phases of that crisis. Here are the numbers.

The Crash
Return Comparison From 15-Nov-19 to 23-Mar-20
  Growth Value S&P/ASX 200
Total Return -25.08% -29.31% -25.43%
Excess Return 0.36% -3.87%  
Growth minus Value 4.23%    
The Recovery
Return Comparison From 23-Mar-20 to 31 Jul-20
  Growth Value S&P/ASX 200
Total Return 24.24% 17.29% 18.85%
Excess Return 5.38% -1.56%  
Growth minus Value 6.94%    
A massive outperformance.  You may well have wondered if this pattern also occurred in the last great meltdown – the GFC.  Let’s take a look.
The analysis that follows uses three tradeable and highly liquid indicators: 
  • iShares S&P 500 Growth ETF           -  tracking growth stocks
  • iShares S&P 500 Value ETF              -  tracking value stocks
  • iShares Core S&P 500 ETF               -  tracking the overall market, the S&P 500 Index.
First, let’s look at the COVID era :

 The pattern is the same - growth outperformed value in both the downside and recovery phases of that crisis. But the numbers are even bigger. The outperformance is spectacular (thank you Google, Facebook, Amazon et al.)
Growth is the overwhelming mantra (and frankly, momentum has come along for the ride!) Why?  Here’s a theory.
Before the coronavirus pandemic there were well-established and popular growth trends tied to a variety of disruptive themes. Most, if not all, had a reliance on burgeoning technologies to propel them. The pandemic has had catastrophic consequences for economic structures and social behaviours.  This has put these growth themes on steroids – accelerating them, establishing them as the “new normal” and increasing what were already strong growth rates. A small, non-exhaustive sample of such themes include: 
  • Remote working (WFH – work from home)
  • Online shopping
  • Telehealth
  • Digital relationships v. in-person relationships
  • Privacy as a commodity rather than a right. Selling your data to every bidder, not just the highest (whether you like it or not, whether you know it or not).
  • In-home entertainment v. real world experiences (streaming and gaming v. travel, cinema, theatre etc.)
No doubt you can think of plenty more. Why bother with value when growth is ubiquitous and obvious in these themes?
AND... The massive growth in passive investing and ETFs creates a self-fulfilling virtuous circle for growth stocks. The fastest growing, highest-valued stocks have the greatest weights in indices and so are bought in highest volume with the money flowing into these funds. Which pushes up the values and pushes up the index weights. Rinse and repeat.
These features were either non-existent or much less dominant through the GFC cycle – so that experience was a little different.
Let’s start with Australia:

So growth outperformed on the downside, but underperformed on the upside.
…and the US:

Same deal - growth outperformed on the downside but underperformed on the upside. There just weren’t as many, or as widely revered, poster-children for growth back then.
Coming back to our Australian growth and value fund cohorts, we did some analysis on the top 10 holdings of these funds
The table below shows the stocks popular with the growth funds and not so much (or at all!) with the value funds. 
Name Average Weight Growth No. of Funds Growth Growth Average Weight Value No. of Funds
CSL Ltd 9.45% 15 Growth 5.43% 11 Value
Goodman Group 5.57% 6 Growth - - Value
Afterpay Ltd 5.32% 2 Growth - - Value
Xero Ltd 5.10% 4 Growth - - Value
Nextdc Ltd 5.04% 2 Growth - - Value
ResMed Inc DR 4.97% 3 Growth - - Value
REA Group Ltd 4.85% 3 Growth - - Value
The a2 Milk Co Ltd 4.44% 5 Growth - - Value
Aristocrat Leisure Ltd 4.25% 7 Growth - - Value
Total 48.98%     5.43%    
Those names should look familiar to you – they’ve been getting glowing reviews in the financial press and broker reports for quite some time!
One last, curious, observation:  The total weight for the banks and Telstra is pretty much the same between growth and values funds. Looks like the growth funds have to get their dividend yield from somewhere...
The Banks & Telstra            
Name Average Weight Growth No. of Funds Growth Growth Average Weight Value No. of Funds Value Value
Commonwealth Bank of Australia 6.67% 13 Growth 6.76% 9 Value
Westpac Banking Corp 5.63% 6 Growth 5.95% 14 Value
Australia & New Zealand Banking Group Ltd 5.28% 7 Growth 5.16% 15 Value
National Australia Bank Ltd 4.97% 11 Growth 5.03% 15 Value
Telstra Corp Ltd 3.00% 2 Growth 5.04% 15 Value
Total 25.54%     27.94%    

Recently Published Reports

SQM Research's Top 5 SQM Rated Funds* - 31 August 2020

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* Any Funds in this table that have international investments will have different hedging patterns, from hedged to unhedged or variable hedging. This may have an impact on fund returns. Please refer to the Fund's product disclosure statement for details.

SQM Research's Top 50 ETFs - 31 August 2020
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SQM Research's Market Benchmarks - 31 August 2020

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Ratings Table
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For further information: 
Rob da Silva - Head of Research, SQM Research - Tel: (02) 9220 4606   Email:
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