We are moving from neutral on growth vs. value to all-in on value effective today.  We are sticking with mid cap.  As a result, for clients using Northlake’s thematic models, we have sold all client positions in the Russell 1000 Growth (IWF) and reinvested the proceeds into the Russell 1000 Value (IWD).  There will be no change to client positions in the S&P 400 Mid Cap (MDY) that were purchased at the start of March when we closed our position in small cap to move to mid cap.

Value has performed much better of late.  The improvement began last September when the megacap tech stocks commonly referred to as FANG began a sideways correction that has continued through 2021 thus far.  Speculative tech stocks in areas including software, green energy, electric vehicles, and special purpose acquisition companies (SPACs) continued rising until mid-February but have since corrected 20% to 50%.  Northlake rarely invest in speculative tech stocks.

Value began performing better when megacap tech gave up market leadership, and value performance accelerated in November when the first vaccines were approved.  Value stocks include many cyclical areas that were impacted by the short but deep COVID recession.  The value thesis thus got a boost from the natural cyclical benefit of exiting a recession and a play on the US and global economies reopening.

The outperformance of value stocks over the last six months is the first sustained period where value assumed market leadership in more than five years.  Looking back further, growth has been the winner on a relative basis since 2011.  The shift toward growth is directly related to the Global Financial Crisis or Great Recession that took place from 2007 thru 2009.  By late 2011, the economy had emerged from recession and the stock market had recovered the massive losses from the peak in the fall of 2007 to the low in the spring of 2009.  From then, the economy enjoyed its longest period of uninterrupted growth in many decades until the COVID recession hit.  However, the rate of growth was consistently well below historic levels with notable developments in income inequality and weak job and wage growth. 

The sluggish and unequal economic growth favored growth stocks that do not rely as much on economic growth to drive profits.  The shift in favor of growth accelerated at the onset of the pandemic as an already strong trend toward a digital economy driven by the internet was given a giant boost from stay-at-home policies.  This led to massive outperformance for growth stocks beginning in March 2020.  The combination of almost a decade of growth leadership followed by the pandemic created extreme historical valuation disparities between growth and value stocks.

Northlake believes that a shift to value now will prove beneficial to client portfolios as the reopening of the US and global economies picks up steam with vaccinations becoming widespread.  There is a strong possibility that economic growth has a boom due to pent-up demand that lasts well into 2022 or even 2023.  There is also a possibility that after such a prolonged, extreme, and historic run in favor of growth stocks that the emergence from the pandemic leads to a lengthy period favoring value stocks that brings the extreme value discrepancy back to a more normal range.  At a minimum, Northlake expects the next few years to offer a more balanced return profile between growth and value stocks.

Northlake clients are well positioned should this occur as our Style model should pick up both near-term reopening-driven and long-term secular movements that could favor value.  At the same time, within our individual stock portfolios, we strongly favor large cap, blue-chip growth companies such as current holdings in Apple, Disney, Facebook, Google, and Home Depot.  Northlake’s strategy thus enables a balanced approach that can generate above-average returns but also uses diversification to dampen the volatility of portfolio returns.

MDY, IWD, AAPL, DIS, FB, GOOG/ GOOGL and HD are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.