When it comes to picking stocks for any portfolio, what really matters is the intrinsic sustainable quality of a company and its valuation. We all know that. We also know that the main sources of volatility, and sometimes risk, come from a combination of five key parameters: gross exposure (or leverage), net exposure, sector exposure, individual stock exposure and factor exposure.

Most of the time, bar once every 25-30 years or so in our experience, factors play a lesser role. Recent markets and funds’ performance in the industry demonstrate that we are experiencing one of those periods when factors matters.

During such times, it is worth reminding ourselves of these considerations. A company rated quality one year can be moved to a different style factor the next year as clever statisticians see fit. It can even share different factor characteristics at the same time. We also would add that the terminology of such factors can also be misleading. For example, Dassault Aviation exhibits a very low capital intensity, a high return on capital employed and is net cash. Nevertheless, in our view, it is a very well managed and high quality company that is typically included in value baskets today.

That being said, the graphs below are interesting in our view, especially after the well-publicised performance of such a factor to the detriment of others year-to-date. Short term, the valuation of value-rated stocks has barely moved, as indicated below (MSCI Erp Eur Growth/Val).

Whilst their earnings growth outperformance has been much stronger, the chart below depicts the relative earnings growth of value vs growth.

Taking a slightly longer term view, since 1975, is quite revealing that we are still at the bottom.

Perhaps recent habits do die hard.

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