In fact, based on the leading US stock index S&P 500, the difference between growth and value shares is now greater than during the dot-com bubble at the turn of the millennium. The valuation of value shares has remained virtually unchanged for ten years, while the multiples of growth shares have reached new heights and made the deviation record high.
October was a very pleasant month for Pareto Global, with a return of over seven per cent. The vast majority of companies in the portfolio contributed to the sharp rise, led by Prudential, Centene, Ryanair, Polaris, SAP, Lennar and Michelin. We are now being rewarded for having been patient owners of solid companies with strong momentum in their underlying value creation, and not least for having been true to our value-oriented philosophy and increased our holdings in periods when companies have traded at attractive price levels.
Polaris
One company affected by the ongoing trade war is Polaris. The company assembles its Powersports products in the US and imports parts from China. When we bought the stock, tariffs of ten per cent were already in effect, and a solution to the trade conflict seemed likely. After more than a 15 per cent increase in the share price from the time of our purchases, the gain was erased when Trump surprisingly announced that tariffs would increase to 25 per cent.
Despite the tariff having been raised from 10 to 25 per cent, Polaris increased its guidance for the year when reporting in July. Shortly thereafter, Trump raised tariffs further to 30 per cent, and it was expected that the company would eventually have to adjust expectations downwards. Amazingly, Polaris again increased its guidance in October. The share rose 11 per cent on the report and has been a significant contributor to the fund's solid return so far this year. Significant investment in research and innovative product development helped Polaris increase prices by seven per cent in the third quarter. The company is now in a dialogue with the Trump administration about exemption from some tariffs and a clarification is expected before year-end.
Ryanair
Unresolved Brexit and constantly delayed deliveries of the 737-MAX aircraft have weighed on the Ryanair stock in 2019. Both factors, however, must be said to be beyond the company's control. Ryanair increases revenues by 8-10 per cent annually, is the industry's undisputed cost leader and takes market share from weak competitors. In recent years, we have seen that investors tend to price such companies at high multiples and show a willingness to look through periods of short-term profit declines. Nevertheless, at times Ryanair has been priced at a P/E below 10, which we believe is too low for a growth company that for all practical purposes is also debt free. It may appear that the market seems to agree, as Ryanair is up nearly 50 per cent since mid-August.
Value stocks vs. growth stocks
Despite good returns so far this year, there are many companies in the portfolio that we believe have significant potential. We can highlight our well-capitalised finance companies, which are trading at record lows despite good earnings growth. We also have significant exposure to US health insurance, which is still trading at low price levels compared to earlier this year.
Over time, value stocks have yielded better returns than growth stocks. Our significant exposure to value stocks makes us very positive about the outlook for returns, not least because we see emerging signs that the trend once again is turning in favour of value stocks.
Portfolio management team
Andreas Sørbye
Lead portfolio manager
Andreas Kamvissis
Portfolio manager
Pareto Global A had a return of 7.4% in October and 10.8% on average for the past 5 years as per 10/31/2019.
Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on, market developments, the portfolio manager's skill, the fund's risk profile, as well as fees for subscription, management and redemption. Returns may become negative as a result of negative price developments.