Value - The reports of my death have been greatly exaggerated
At MASECO we look to overweight value stocks in our worldwide equity allocations. Value investing is an investment strategy that focuses on equities that are underappreciated by investors and the market at large. As a result, these equities have lower valuations relative to the other companies in the index and look to be trading at a cheaper price when compared to their underlying fundamentals, such as revenue and earnings.
Notable value investors include Nobel Laureates Eugene Fama, Ken French and Robert Shiller. If you have visited our offices you may have noticed that we have named three of our meeting rooms after these men. Another notable mention is of course “The Sage of Omaha”, Warren Buffett, who is arguably one of the world’s most famous value investor.
Over the last five years, cheap value stocks have underperformed more expensive growth stocks. As evidenced by the chart below, which shows the Russell 1000 Value Index underperforming the Russell 1000 Growth Index. This underperformance of value has been pronounced in the US, but can be seen in other equity markets across the globe.
Difference in annualized total returns over rolling five-year periods
Source: Vanguard, using data from Russell, as of December 31, 1983, through July 31, 2020.
Whilst this underperformance has been disappointing, it has not been completely unexpected. We expect periods of underperformance to occur but are unable to determine when they will occur. We do not believe it is possible to time the markets and cannot predict when value will again outperform growth stocks.
The below graphic shows why we look to overweight value. Using data going back to 1926 in the US and more recent for ex-US, we expect these periods of value under performance to be in the minority. The US Markets graphic shows that from 1926 to December 2019, in overlapping 10-year periods, growth outperformed value only 17% of the time. With these statistics in mind, we continue to prefer investing with an overweight to value in the US which has outperformed 83% of the time since 1926. This value outperformance versus growth is also evidenced in Developed ex US and Emerging Market equities.
Developed ex-US Markets
Source: Dimensional Fund Advisors, as at 31 December 2019.
With the recent period of outperformance of growth stocks relative to value stocks (see Chart 1), there has been a lot of media commentary that ‘Value Investing is Dead’ and that value investors can no longer expect to outperform the market. However, from Q4 2020 to date, this prophecy on the death of value investing has been undermined.
Through the final quarter of 2020 we saw strong value outperformance throughout US, Developed Markets ex-US and Emerging Markets. This outperformance has continued into the first weeks of 2021 in US and Developed Markets ex-US. It is also worth noting that MASECO is currently overweight Emerging Markets relative to the MSCI all country world index.
We believe value can continue to outperform growth and the market as a whole.
In our opinion continuing to overweight value should protect downside risk if we experience another period of volatility in equities. Benjamin Graham noted in his book ‘The Intelligent Investor’, “The margin of safety is always dependent on the price paid.” Value equities can encounter challenges, yet we feel they may still be able to produce earnings per share that would represent an attractive percentage of their current share price. As such, we believe they may be less susceptible to future market headwinds should they come.
When investing it is always important to remain level headed and to ignore the headlines that can take us off course. MASECO will continue to use research, evidence and gather data to build our asset allocation and filter out the headlines that try to distract us from your goals.
Source: Koyfin, as at 28 January 21
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Use of information:
- Nothing in this document constitutes investment, tax or any other type of advice and should not be construed as such.
- The investments and strategy noted in this document may not be suitable for all investors and making available the information in this document is not a representation by MASECO that any investment strategy is suitable for any particular client.
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