Michael:

Hello, Michael Burman here, Managing Director with JPMorgan Asset Management. And I'm thrilled today to be joined by Jonathan Simon, the Lead Portfolio Manager of Mid Cap Value, and of Value Advantage Strategy. One of the questions that clients ask the most is around value and growth, and how should we be thinking about allocating client portfolios going forward? So we have a few questions for one of our experts, Jonathan Simon.

Let's jump right in. Jonathan, question number one. We're looking at a 10 year style box chart return. Value has certainly done very well, however, growth, regardless of the size, has also outperformed, and it's done so in a sizable way, one of your favorite musicians has a song, What's Going On. Jonathan, let's ask you that first question. What's going on?

Johnathan:

What's going on is that coming into 2020, the trends were already in place. Value was performing in a disappointing way relative to the growth and the market as a whole. And then we're hit with this global pandemic, and lo and behold, the value sectors, financials, and energy are particularly hard hit by the deep recession we had, and growth sectors, particularly technology, of course, were generally beneficiaries of what was going on. And coupled with the fact that rates are at all time low levels has justified higher and higher evaluations for growth. But as you see from the chart, we've had a nice rebound, and even the value strategies are all showing double digit compounded rates of return for the last 10 years. So it's not all bad.

Michael:

Let's dig a little bit deeper. One of the sayings that we hear in a bull market is, "A rising tide lifts all boats." What observations would you share on, a rising tide lifts all boats?

Johnathan:

I think on this chart, you'll see that interestingly out of the 500 stocks in the S&P, 300 of them are still either down for this year or were underperforming the market as a whole. And now a lot of those companies, back in March, April, we were questioning whether they could make it through, but now, with maybe a few exceptions, survival is no longer in question. And now we can focus on stocks that are depressed in terms of valuation, and try to decide whether their businesses, their revenues and their earnings will get back to peak levels and grow from there over the next few years. There's always one caveat, there will be some value traps, if you like, amongst those under performers, companies, whose businesses are going to be different following the global pandemic, but there's still a wealth of opportunity for investors.

Michael:

So we've just covered two of the three P's. We've covered performance, we've covered stock participation. Now let's look at PE's. This chart that we're looking at chose the relationship of growth stock PE's, in green, value stock PE's in blue. Some people internally at JPMorgan refer to this as, "The musician formerly known as, call it, Party Like it's 1999." Johnathan, what lessons or questions do you think investors should be asking when they look at this chart?

Johnathan:

Well, interestingly, the question I always get is, does it feel like the great financial crisis? Or is it more like the dot com bubble, and frankly the 10 year ago great financial crisis, everything went down. And I think this chart illustrates how clearly the valuation disparity between what we call value stocks and what we call growth stocks is very similar today to the levels that we reached at the end of 1999. So I will go with the '99 analogy.

Michael:

Jonathan, you've successfully managed money for almost 40 years. If there was one thing that you could share to help investors be more successful in the future, what would that be?

Johnathan:

I think I'd say that now is a wonderful time to be able to build that diversified portfolio of good companies that are trading at attractive valuations. As I said before, they have made it through the tough times, there's light at the end of the tunnel, and there are good prospects of their business revenues and profits returning to record levels over the next few years. So my feeling is, I don't know what's going to happen in the next year, that's for short term market pundits, but I do believe that over the long term, patience will be rewarded, and that there's a great opportunity for value investing for the next 10 years.

And I hope everybody's enjoyed Michael's musical references, and I'd like to conclude with one of my own, which goes back to the rock opera, Tommy, by The Who. And even though I'm not making any predictions for the short term, I got a feeling '21 is going to be a good year.

Michael:

Jonathan, we've heard you mentioned patience will be rewarded on more than one occasion. Thank you for sharing your insights and perspectives today. If you're watching this video, thank you for taking the time.

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