Investors should move away from high-growth sectors and shift towards value stocks as the global economy begins to recover from the pandemic, suggests Vinicius Kagel, senior partner at Deutsche Wertpapiertreuhand gmbh (DWPT).
Noting the strong performance of high-growth sectors following the announcement of credible vaccines late last year, and into the first quarter of 2021, Mr Kagel believes that the combination of increased interest rates on treasury bonds alongside the risk of inflation means that a value play is increasingly attractive. He also feels that the expensive valuations of growth stocks are reducing the possibility of strong returns for investors.
He says: “From my perspective, you should avoid strategies or funds investing in the highest growth sectors, where valuations are too high. As far as I am concerned last years winners will not work as good as before. Cyclical value and dividend stocks could potentially increase performance with rising interest rates this year."
Mr Kagel recognises that there are possibilities for encouraging returns in some growth stocks, and he would not advocate a complete shift to value, cyclical or dividend holdings.
Instead, it has to be a measured rotation. Investors are, in his view, too optimistic and impatient about the performance of portfolios during the recovery period as developed markets begin to open up following the arrival of multiple high-efficacy vaccines.
Reflecting on the market conditions following the pandemic, he argues: “With no doubt, numerous growth companies are likely to have a strong development in the future. Nevertheless, It can be disappointing for the short term, as there are lots of expectations priced in the short term. Additionally, interest rates may raise, due to rising inflation concerns."
This perspective is reflected in his own approach to the market. Previously, Mr Kagel focused on growth consistently throughout 2020 even during the turbulence of the pandemic. He has since shifted approximately 15 percent of his equity portfolio into value.
Explaining his investment behaviour over the past 18 months, he says: “Last year I was overweight in growth funds within my offensive mandates. At the beginning of the year, I reduced the allocation to growth funds and shifted to value and dividend strategies within the equity markets. It was adjusting to the new expectation, that there could be more value and potential in the sectors, strategies and styles which underperformed last year.”
Mr Kagel outlined his position exclusively to Fundeye, which is profiling the senior partner as part of its series on top-rated fund selectors and managers at SharingAlpha.
Alongside his role at DWPT, Mr Kagel is a contributor for the investment platform. He has featured on last year’s list of the top global fund selectors, placed as the top selector in Germany.
On a day-to-day basis he offers wealth management services such as discretionary portfolio management, advice, and execution-only brokerage to clients. He joined DWPT two-and-a-half years ago, following multiple roles at investment banks and financial institutions, including an extensive period at BNP Paribas Asset Management.
His position as senior partner is a flexible and mostly independent position, where he is able to select and structure portfolios to his liking, and recommend strategies that could appeal to a wide range of investors. The fund specialist is also self-employed, with his own family office where he acts as its chief executive officer and as a portfolio manager. A situation that Mr Kagel describes as a mix of both worlds.
The clients at DWPT are nearly exclusively based in Germany, with others situated in Switzerland, but the products offered to them are international in nature. As long as they are available in Germany, they are available for his clients.
For instance, Mr Kagel confesses to being a big fan of emerging markets, particularly in Asia, and the long-term growth opportunities they can provide, while also favouring strategies with a global focus.
This is reflected in his list of recommended products. Among the strategies he has selected are established names such as Baillie Gifford, Morgan Stanley, and AllianceBernstein, but he also has less common picks such as Atlas for Japan along with Comgest and T.Rowe Price on his list. These selections exist in a wider investment universe he watches and turns over on a regular basis.
Commenting on his approach to selecting funds, Mr Kagel said: “I have a lot of watchlists and tools to observe and analyse funds as well as using a lot of different sources of internal and external research to identify new investment trends and find suitable investment solutions for my strategies and clients."
The senior partner’s hesitancy about growth opportunities should not be read for pessimism. Mr Kagel considers value to be a long-term play, and remains positive about equities broadly. He is not in favour of a shift to fixed income, and is upbeat about the opportunities in technology investing.
He believes technology is a structural opportunity that will continue to grow beyond the cyclical nature of the Covid-dominated investment landscape. While he expects some adjustment, he did not expect technology holdings to be over-valued.
Mr Kagel concludes: “There's a lot of potential and a route to growth. All arguments for technology are in my opinion, still valid. They should dominate the economy and therefore the stock market in the long run.”
Vinicius Kagel is a contributor to SharingAlpha, and was interviewed by Fundeye as part of its series on the platform’s top fund managers and selectors.
