As value investing has been back in vogue lately, and value has outperformed growth since November 2020, CAMRADATA’s latest whitepaper, Revisiting Value Investing explores the ongoing Value versus Growth debate – and asks if there are signs of a changing tide.
The whitepaper includes insight from guests who attended a virtual roundtable hosted by CAMRADATA in April, from firms including Boston Partners, Hotchkis & Wiley, Royal London Asset Management, Blue Sky Group, PwC, SEI and St James’s Place Wealth Management.
The report highlights that, according to Bank of America, the first quarter of this year marked the biggest rotation into value stocks for 20 years. This followed the longest ever drawdown for value, which also suffered its worst ever calendar year in 2020.
Sean Thompson, Managing Director, CAMRADATA said, “Ongoing fiscal stimulus targeted at cyclical and value areas of the market are set to favour certain value stocks, while other factors such as rising inflation also benefit value stocks over longer duration growth stocks.
“Meanwhile, valuation spreads remain extreme, and the global earnings recovery is largely being led by value sectors. Our panel debated value versus growth and considered if we are witnessing signs of recovery for value investing strategies.”
Data from Boston Partners shows that by the end of 2020, Growth was at its most stretched this century, judged by the P/E ratio of MSCI Growth Index versus MSCI Value Index. Since November, however, market-watchers and practitioners have been pointing to evidence of Value’s return as a rewarded style.
The CAMRADATA roundtable began with an acknowledgement by consultants, fiduciaries and fund selectors that after so many years of Growth’s dominance, many clients remain unprepared for Value’s return.
The panel also discussed growing interest in value investing, the challenges facing value managers, as well as looking at Value via an ESG lens, before considering another classic Value sector – financials.
Managers were asked what clients are not getting by investing in their strategy; and what they meant by Value and also ESG which is growing in importance for clients.
Key takeaway points were:
- One panellist kicked off by highlighting that there been some expression of interest in value investing over the last 18 months, but client conversations were more focused on whether the Growth rally would continue.
- One investment consultant said the interest in value investments from their clients has been more via credit dislocation strategies.
- With attention then turning to financials, a panellist noted that banks generally do better during rising interest rates and improving economic activity. There is a lot of capital trapped in banks, while the Covid-19 loan loss provisions booked in 2020 look unlikely to be realised.
- Value investors first get a boost from improved earnings, followed by an improvement in multiples once the market recognises what those improved earnings mean.
- When asked what they meant by Value, one panellist said valuation is about what you pay for something versus the cashflows.
- Another said value investors purchase stocks trading at a significant discount to their intrinsic value because current earnings are below normal earnings.
- But what constitutes “normal”? They said this goes to the heart of the Value investors’ research process; estimating a company’s sustainable earnings level under equilibrium economic conditions.
- The panel discussed ESG, with one panellist suggesting that, up until the new Biden administration, North America has generally been behind Europe in embracing ESG criteria. They also noted that ESG data is still underdeveloped and proliferating quickly.
- It was suggested that society needs Value investors, with one panellist saying they invest in out-of-favour companies; sometimes due to ESG issues, evaluate management’s ESG improvement plan and develop mileposts to monitor progress against the plan. If they are successful, the company improves and its stock price rises as the mileposts are reached.
- Value investing has to be difficult one panellist concluded, as if it wasn’t, everyone would do it and it wouldn’t work anymore. It requires patience – taking the long-term view in short-term markets – humility – learning from your mistakes – and conviction, especially if you are concentrated. They ended by saying they are more optimistic now than they have been for years.
To download the ‘Revisiting Value Investing’ whitepaper click here
For more information on CAMRADATA visit www.camradata.com