While high growth/momentum stocks have performed well for some time, they have historically been susceptible to momentum crashes which have tended to coincide with bear market periods. As stock markets reach all-time highs and the US enters its tenth year of economic expansion, we think that having exposure to value stocks still makes good sense. We have long been of the view that having balanced factor exposure is the best way to achieve excess returns, and now does not seem the time to abandon this philosophy.
One of the most dominant trends playing out in markets at present, and for much of the past decade, is the preference for high growth/momentum stocks over highly unfashionable value stocks. It is not too difficult to imagine why exciting growth companies such as Amazon have a much more compelling narrative compared to bricks and mortar retailers like Bed Bath and Beyond, but the unusual extent of value underperformance has occurred almost irrespective of fundamentals.
The power of modern-day market narratives manifests itself most obviously on the rare occasions I find myself discussing investment-related subjects in a social setting. It will come as no surprise to readers that such conversations tend to be dominated by a few predictable topics, most of which include the word ‘Bitcoin’. Thankfully, discussions with my professional colleagues are more varied and instructive (although whether or not they would make for entertaining dinner party conversation remains doubtful). While Bitcoin is perhaps an obvious example of the power of trends, us investment professionals can also be guilty of succumbing to the various fashions of the day.
In theory, the idea that companies have some ‘intrinsic value’ does not appear contentious; it seems almost self-evident that most of us would not want to pay any more than a company is worth for the pleasure of owning it. It is therefore puzzling that investors have been making substantial profits doing arguably just that. Of course, in practice it is extremely difficult to agree on a definition of ‘intrinsic value’, but by most objective measurements it is undeniable that value as a style has been having a torrid time. While market inefficiencies can explain this phenomenon over the short term, the length of the current trend requires active investors to challenge long-held convictions and answer the question, ‘are things really different this time?’
To answer this question, we have undertaken a thorough review of the value factor which we will be publishing this week. In this document we broadly address the following questions: (1) Why should we be exposed to value? (2) Why has it underperformed? (3) How should we think about our exposure in the future? At the risk of spoiling the conclusion for our readers, we can reveal that we believe value investing still has an important role to play within diversified portfolios, particularly at this point in the cycle.
Several common arguments are made for the continuing lacklustre performance of value stocks. In our report, we focus on macro factors such as declining growth and the downward path of interest rates, as well as the success of large technology companies with apparently inaccessible barriers to entry due to scale. While there is some truth to these arguments, there are uncomfortable echoes of the 2000 technology bubble in this line of thinking. Ultimately, we believe that behavioural factors can provide a better explanation for some of the extremes we are seeing today, and these factors do not necessarily favour one style over another.
If you would be interested in reading the full document, please do get in touch with our distribution team. We would be happy to share our research and respond to any comments/questions you may have.