Value investing lost AGAIN, but it’ll be back

Growth has been king for more than a decade now. So how do professional value fund managers explain the underperformance to their clients?

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It’s been a rough few years for value investors.

Ever since the global financial crisis, growth stocks have easily outperformed value shares.

Many factors — such as low interest rates, technological change, and government support — have converged to form favourable conditions for growth shares.

Investors have been rewarding companies seen to be part of the future, and finding boredom in businesses that are already earning a profit.

Bank of America Corp (NYSE: BAC) even declared the death of value investing last August. 

And that’s meant many value funds and their highly paid managers have underperformed, much to their professional embarrassment.

For example, in a year when ASX-listed exchange-traded funds (ETFs) saw a record amount of new money pouring in, traditional value manager Schroders (LON: SDR) saw its ETF equity base shrink.

So how are value investors defending themselves in a world that’s against them?

Maple-Brown Abbott: We’re going to hold tough

Maple-Brown Abbott head of Australian equities Dougal Maple-Brown said his team has fielded some “very tough questions” from clients over the last 10 years about the failure of value investing.

“In Australia, yes, we have lost some clients,” he told a briefing this week.

“[But] people employ us to be a value manager. That’s what it says on the tin.”

Maple-Brown said the team would remain faithful to the strategy.

“We have generally held the course, which has been excellent. And they’ve been handsomely rewarded in the last quarter. But that’s just one quarter and there’s a lot more to go.”

The company’s managing director Sophia Rahmani admitted clients could get fatigued with repeated quarterly presentations espousing how the market valuation is at historic and dangerous highs.

But this repetition also showed her team was staying true.

“Our Australian and Asian investors know that they’re getting a disciplined values manager with that,” she said.

“We’re definitely going to hold tough to what we do, because we believe in it.”

Will Gray: Value will be back with a vengeance

Will Gray, director of ‘contrarian’ investment house Allan Gray Australia, admitted this month it’s been a hard life backing value shares.

“2020 was another such occasion, with many of our funds underperforming their respective benchmarks over the calendar year,” he wrote to his clients.

“We personally share these tough times with you, as substantial co-investors in the funds, through very low firm profitability/small losses due to our performance-based fee structures, and through lower individual remuneration – and that’s exactly how it should be.”

Gray reminded his clients that value investing had worked “spectacularly well” for many decades until the 1990s internet bubble.

“The approach came roaring back into fashion in the wake of the dotcom bust, yet now finds itself being similarly tested once again,” he said.

“We aren’t smart enough to predict the timing or duration of these changes, but we do know that they have been cyclical in the past.”

Buying cheap will never go out of fashion

Paying less than what a company is worth is “a timeless recipe for investment success”, according to Gray, even if it meant waiting a long time on the sidelines.

“Rather than relying on a ‘winner’s game’ consisting of spectacular streaks of brilliance, a better approach is to contain mistakes and invest with controlled conviction,” he said.

“While it may not be the most fun to play, it is a winning strategy for those who have the discipline, patience and humility to stick with it.”

Gray predicted the end of growth-over-everything era is now within sight.

“The improvement in our investment performance over the last two months of the year, coincident with news of several effective COVID-19 vaccines, is encouraging in that regard,” he said.

“Even so, the extent of that move barely registers as a blip on a longer-term chart. It is exciting to think what might be possible if current valuation gaps begin to close in earnest.”

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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