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Great Year for HCP’s Value Stocks

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Stockholm (HedgeNordic) – After years of muted performance driven by a long-running underperformance of value stocks, systematic value-focused fund HCP Quant reached its best annual performance in 2021 with a full-year return of 47.5 percent. The gradual and overdue rotation to value stocks from pricier growth stocks catapulted HCP Quant to be one of the best-performing funds within the Nordic Hedge Index last year.

“The rotation into value stocks that began in 2020 has accelerated further, which has been reflected in HCP Quant’s good returns in the recent period.”

“The rotation into value stocks that began in 2020 has accelerated further, which has been reflected in HCP Quant’s good returns in the recent period,” says Pasi Havia, the portfolio manager who runs HCP Quant’s concentrated portfolio of small- and mid-cap deep-value stocks. “We are now entering an era where central banks are tightening the monetary stimulus, interest rates are shooting upwards and inflation is rising. All of these support the re-emergence of value stocks,” argues Havia.” Indeed, many have claimed 2022 to be the year of value stocks.”

One cannot be certain that 2022 or any other year will represent a good period for value stocks, acknowledges Pasi. However, “at least good conditions exist for value stocks to perform well.” According to HCP Quant’s fund manager, “when the market cycle finally turns, there is usually a long period ahead. However, the road to leveling out the discrepancy in the relative valuation of value versus growth is never a straight line.” Although the next ten years may represent “a new golden age for deep-value securities, there will be years when growth stocks perform better on a yearly basis,” says Pasi. “Cycles should be viewed long term.”

HCP Quant’s best investment last year was a Chinese electronics company that manufactures graphics card components, which saw its share price quadruple since the initial purchase. Deep value securities are also more prone to takeover attempts, which represents an efficient mechanism for unlocking shareholder value and an important return source for HCP Quant. Despite the fund’s overall strong performance, there were enough failures in the portfolio, acknowledges Pasi Havia. Six positions were closed out during 2021 after hitting the stop-loss limit of 20 percent. “However, what matters is the overall result and we can be satisfied with it for the past year,” says Havia.

“Even after a sharp rise, the valuations of value stocks cannot be said to have heated up. On the contrary, they are even cheaper than a year ago relative to fundamentals.”

Despite the recent rise in valuations of lowly-rated companies, HCP Quant’s portfolio still sits at a price-to-earnings ratio of around 6.0, a price-to-sales under 0.7, an enterprise value to EBITDA around 4.0, and a current dividend yield of 6.4 percent. “Even after a sharp rise, the valuations of value stocks cannot be said to have heated up,” says Havia. “On the contrary, they are even cheaper than a year ago relative to fundamentals,” he continues. “If anyone is wondering if there is still room to rise after a big rally, there is hopefully even more to come.”

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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