Stock market bargain hunters continue to believe in it

Since 2009, stock markets have gone in only one direction: up. Curiously, one category of investors has systematically underperformed during that period, namely the value or value investor. These seek refuge in stocks that have fallen out of favor with the market and therefore quote below the price they are actually worth. "We mainly look at companies and sectors whose share price has been punished by negative sentiment or macroeconomic developments, but which are still profitable and financially sound," says Javier Sáenz de Cenzano of Spanish asset manager Azvalor. That manages some 1.7 billion euros based on the value strategy. "The core is to buy stocks cheaply and wait for the market to re-estimate them to their true value." The value investor is the bargain hunter of the financial markets. Its counterpart is the growth investor. The latter is willing to pay more for a stock, with the prospect of being amply rewarded for it if the company grows and makes more profit in the future.

Value is dead

The ultimate value investor is Warren Buffett. His success, many believe, proves that value investing is a superior strategy. But the past decade has proven anything but that. For example, U.S. asset manager O'Shaugnessy Asset Management calculated that the growth strategy has delivered 136 percent more return than the value strategy since 2007, a difference of 4.3 percent per year. Value investors have been underperforming for so long now that the question arises whether that strategy will ever recover. "Value is dead," is a common slogan in the investor world.

For Andrew Evans, who manages Equity value funds for the asset management firm Schroders, there are few reasons to panic. "Our clients often ask about the cause of this long-term underperformance of value," he says. "But 150 years of investment history shows that value investing outperforms the market average over the long term." That's because of people's herding behavior, according to Evans. "When things are good, investors overpay; when things are bad, they walk away and miss opportunities. Value investing capitalizes on people's fear and greed. Besides, it's not the first time value has done relatively less."

"The essence of value investing is buying stocks cheaply and waiting for the market to re-estimate them to their true value."
- JAVIER SÁENZ DE CENZANO, AZVALOR

The global economy has been on an upward trend for nearly a decade, which is not the best environment for value investors. There are fewer and fewer bargains to be found in the stock market as all prices have risen along with it. "To get good results with the value approach, the business cycle has to go up and down. That way you can take advantage of exaggerated market reactions," Evans explains. "Only now we are in an unprecedentedly long upward cycle, which is being extended all the time, for example by the central banks' buying programs." Kris Hermie, fund manager at Belgium's Value Square, agrees: "Value works best in periods of economic recovery."

Monetary experiment

Central banks' buyback programs have allowed much of the money pumped into the financial system to flow into equity markets. "That unprecedented monetary experiment is the main cause that the underperformance of value is so severe and lasts so long," affirms Javier Sáenz de Cenzano.

Moreover, low interest rates are leading a lot of wealth to look for extra returns. It thinks it can find that in equities. "Investors have a lot of money to spare for the possible future growth of equities," Kris Hermie explains. As a result, the entire stock market is highly valued, especially growth stocks. "The difference between the valuations of value and growth stocks has rarely been so great," Hermie and Sáenz de Cenzano say in unison.

The rise in equity markets is also compounded by the explosion of passive investing through ETFs and index funds. In the past decade, these have had inflows of $2,700 billion worldwide. Skeptics call it stupid money, just flowing into certain stock indexes without having any idea of what those stocks are worth. "The best-known global stock index consists of 60 percent American companies, while the United States accounts for only 24 percent of global gross domestic product," Kris Hermie explained. "In the index of the five hundred largest U.S. companies, the five largest are the same size as the three hundred smallest. Passive investors often don't know what they are buying, nor that most of their pennies are going to those big companies."

Value performs best when the business cycle rebounds after a hit
- Kris Hermie, Value Square

Hopeful signs

It is waiting for the moment when value begins to perform above average again. "We don't expect a single event to initiate the turnaround," Andrew Evans says of this. "There is no single scenario by which you turn on or off the success of value. Often it's just waiting for stocks to quote overly cheap."

Kris Hermie sees hopeful signs. "Value performs best when the business cycle rebounds after a hit. Currently, the business cycle barometers for industry and services point to a possible downturn. The share prices of many cyclical companies have already taken a 40-50 percent hit. That creates opportunities." Azvalor sees opportunities in the brexit, for example. "You see investors collectively fleeing companies that may be affected by brexit. But not all those companies will suffer equally," Sáenz de Cenzano explains. "With the right analysis, temperament and patience, you can take advantage of that as an investor."

In addition, the interpretation of value strategy also changes over time. "The definition of value is a perpetual debate, but staying true to your style is crucial," Kris Hermie argues. "It depends on many factors, but building in enough margin of safety is the key."

None of the three fund managers is upset by the recent poor performance of the value approach. "Buying something at a lower price than it is actually worth always makes sense and will always make sense," Javier Sáenz de Cenzano sums it up.

Disclaimer

• Source: Trends
• Author: Jef Poortmans
• URL: https://trends.knack.be/economie/magazine/iets-kopen-tegen-een-lagere-prijs-dan-het-waard-is-houdt-altijd-steek/article-normal-1523933.html