The Australian share market is well into the green today, with the S&P/ASX 200 Index (ASX: XJO) up 0.6% at the time of writing.
The share price gains on the ASX follow on another strong day in the United States. The S&P 500 Index (INDEXSP: .INX) closed up 1.0% and the tech-heavy Nasdaq Composite (INDEXNASDAQ: .IXIC) gained 1.7% yesterday (overnight Aussie time). Both indexes hit new record highs.
That's a good reminder of why you should consider investing some of your money outside of the ASX. (I explain why in greater detail in this article, penned yesterday.)
Tech companies continue to benefit from the same COVID-19 mitigation measures that are still hampering travel, entertainment and hospitality share prices. The trend of people working, shopping and socialising from home saw the big US tech companies — the 'FAANG' stocks — all close at their own record highs.
Having capitalised on the explosive growth in the demand for streaming video during the age of social isolation, the Netflix Inc (NASDAQ: NFLX) share price gained a whopping 11.6% yesterday. That brings Netflix's year-to-date share price gain to 66%.
But in an encouraging sign that record share market gains aren't limited to US shares, the global basket of stocks in the MSCI All-Country World Index also hit all-time highs.
Created by MSCI Inc, the All-Country World Index mirrors the performance of more than 2,700 small- to large-cap shares around the globe, from 23 developed and 24 emerging markets.
With all these gains already on the board, it's fair to wonder how long this bull can keep sprinting.
The answer, according to David Donabedian, chief investment officer of CIBC Private Wealth Management, is quite some time.
As quoted by Bloomberg, Donabedian says: "The continued market juggernaut is certainly impressive. The idea that we're going to have a rip-roaring rebound in the third quarter has been supported by the data."
With record low interest rates, government fiscal stimulus, and central bank quantitative easing (QE) likely to remain in place for the foreseeable future, a 'rip-roaring' third quarter share market performance certainly looks achievable.
But with momentum investors helping drive companies like Afterpay Ltd's (ASX: APT) share price up 185% year-to-date, and competing buy now, pay later (BNPL) company Sezzle Inc's (ASX: SZL) share price up 512% this year, you'd be forgiven for wondering if value investing is well and truly dead.
Value investing in the 2020s share markets
As reported by the Australian Financial Review (AFR), research by Morgan Stanley showed the value factor returned -23% for the year to 14 August, while the growth factor returned 10%.
That's not a good outcome for diehard value investors. But it hasn't deterred Anthony Aboud, the portfolio manager for Perpetual's Pure Alpha hedge fund, focused on value investing.
In an investor letter, Aboud wrote (as quoted by the AFR):
Value investing does not mean buying structurally broken businesses because they trade at low price to earnings multiples. It means getting into the weeds and scouring for quality companies which generate sustainable cash flows that aren't always obvious at first glance.
As fundamental investors, we are trying to identify well-managed, great businesses with a good longer-term growth profile that may not be obvious to the naked eye…
Value investors will minimise risk by waiting and buying those shares at a discount. This discount usually occurs when short-term issues cloud the market's perspective about the long-term underlying value…
In this market, buying at any price is working and the buying discipline is leaving fundamental (value) investors well and truly behind…
When it comes to some of the ASX best performing shares, like AfterPay and Sezzle, Anthony Aboud believes their moats, or barriers to entry, might not hold back the incoming tide of competitors for long.
"I would argue we will see the competitive landscape become more crowded for BNPL companies or investment platforms over the next five years," he stated.
AI puts a new spin on value investing
As we march into the 2020s, the definition of value is coming under the microscope.
Specifically, how do you value intangible assets, like expenditures on research and development, over simply adding up a company's capital. In a world where knowledge is increasingly valuable, even an AI system geared for value investing turned to what many would consider growth plays.
As Bloomberg reports, last week Qraft Technologies filed to create the Qraft AI-Enhanced US Next Value ETF. In back testing, the system had a gain for 13% for the year through July while the S&P 500 Value Index lost 3% over that same time.
So what were the top 3 holdings in the Qraft ETF?
Amazon.com Inc., Alphabet Inc. and Facebook Inc.
Addressing the seeming disconnect between these holdings and traditional value shares, founder Hyungsik Kim wrote in an email (quoted by Bloomberg):
Intangible assets have become a more important factor in the actual value of the company due to the development of information technology. It is easy to tell which of the following is more important in measuring the value of Amazon: warehouses (tangibles) or automated logistics systems (intangibles).
As times change, we investors need to adapt. And when it comes to momentum (growth) investing versus fundamental (value) investing, I believe a flexible strategy could deliver the best share price gains in a diversified portfolio.
