Article valuefondsen | (Artículo original en neerlandés y francés, traducido a inglés)
“Buying something at a lower price than it’s worth, always makes sense.”
Equity markets have been rising for ten years, but not all investors have benefited equally. In particular, value investors, of which Warren Buffett is the main name, have been consistently underperforming in recent years. Despite their performances, they remain true to their approach.
Over the past ten years, equity investors have performed well. Since 2009, stock markets have had only one direction: up. Strangely enough, one type of investor, or specific investment strategy, has consistently performed poorly, namely value or the value investor. He seeks investment salvation in shares that have fallen out of the market’s favour and are therefore quoted at a lower price than they are actually worth. “We look in particular at companies and sectors whose share prices have been punished by negative sentiment or macro-economic developments, but which are still profitable and financially sound,” says Javier Sáenz de Cenzano of the Spanish asset manager Azvalor. It manages some EUR 1.5 billion under the value approach. “The core is to buy shares cheaply and wait until the market estimates them at their real value again.”
So the value investor is the bargain hunter of the financial markets. The counterpart is the growth investor. They are willing to pay more for a share with the prospect of being amply rewarded by the future growth and profitability of the underlying company.
136 percent less over 10 years
The ultimate example of the value approach is Warren Buffett. According to many, his success is proof that it is a superior strategy. Over the past ten years, however, this has been far from being the case. For example, the American asset manager O’Shaugnessy Asset Management calculated the difference in return between the value approach and the growth approach since 2007. The latter has achieved 136 percent more return in that period, which is equivalent to 4.3 percent per annum. The underperformance of value investing has been going on for so long now that the question arises as to whether the strategy will ever recover. ‘Value is dead’ is a frequently-heard slogan in the world of investors.
For Andrew Evans of asset manager Schröders, there are few reasons to panic. He manages the Equity value fund. “Our clients often ask about the cause of the long-drawn-out underperformance of the value approach,” he says. “First of all, 150 years of investment history show that in the long run, value investment always outperforms the market average.” According to Evans, the reason for this lies in the herd behaviour of people. “When things go well, investors pay too much, when things go badly, they walk away and miss out on opportunities. Value investing capitalises on people’s fear and greed. Moreover, it is not the first time that value is doing relatively worse.”
The global economy has been in an upward growth trend for almost ten years, which is not the best environment for value investors. There are fewer and fewer bargains to be found on the stock market because all prices have risen in line with the market. “In order for the value approach to achieve good results, the business cycle has to go up and down in order to benefit from exaggerated market reactions,” explains Evans. “However, we are now in an unprecedentedly long upward cycle, which is constantly being extended by, for example, central bank buy-back programmes.” Kris Hermie, fund manager at the Belgian Value Square, joins him in this: “Value works best in periods of economic recovery.”
Money policy, interest rates and passive investment are the causes
There are several reasons for the underperformance of equity investors. Firstly, a large proportion of the money pumped into the financial system was channelled to the equity markets through central bank buy-back programmes. “The main reason why the underperformance of value is so severe and takes so long is the unprecedented monetary experiment of recent years,” says Javier Sáenz de Cenzano.
In addition, the low interest rate means that a great deal of capital is looking for extra returns and thinks that this can be found in equities. “Investors are willing to pay a lot of money now for the possible future growth of shares,” explains Kris Hermie. As a result, the entire stock market is highly valued, especially growth stocks. Investors want to pay a disproportionate amount for those, hoping for above-average growth over time. “The difference between valuations of value and growth shares has rarely been as great as it is now,” says Hermie and Sáenz de Cenzano unisono.
This increase in equity markets has been exacerbated by the explosion in passive investment through ETFs and index funds. In the last 10 years they have had an inflow of USD 2,700 billion worldwide. Sceptics call it stupid money that just flows into certain stock indices without having any idea what those stocks are worth. “American companies make up 60 percent of the best-known global equity index, while the US accounts for only 24 percent of global GDP,” explains Kris Hermie. “Within the index of 500 largest U.S. companies, the 5 largest are as big as the 300 smallest. Passive investors don’t know what they’re buying nor that most of their money goes to those big companies.”
Not a single trigger
We have to wait for the moment when value starts to perform above average again. “We don’t expect a single impulse to start the turnaround,” says Andrew Evans. “There is not one single scenario that allows you to turn on or off the success of value. Often it’s just a matter of waiting for stocks to quote excessively cheaply.” In this respect, Kris Hermie sees hopeful signs. “Value performs best in an economic recovery, when the economy rebounds after a blow,” he says. “At the moment, the business barometers for industry and services point to a possible downturn. As a result, the prices of cyclical companies have already been hit by 40-50 percent. That creates opportunities.” At Azvalor, for example, they see opportunities in the brexit. “You see investors collectively fleeing from all the companies that may be affected by the brexit, but that is not the case for all those companies,” explains Sáenz de Cenzano. “With the right analysis, temperament and patience, you can benefit from this as an investor.”
Furthermore, the interpretation of the value strategy also changes over time. “The definition of value is a perpetual discussion,” says Kris Hermie. “It depends on many factors.” Andrew Evans focuses on three issues. “First, we’re looking for companies with good business practices. Furthermore, you have to realize that the market sometimes misjudges these companies. Finally, we buy those companies that we think are too cheap to list. That gives us a safety margin,” he explains. None of the three fund managers will be upset by the recent poor results of the value approach. “Buying something at a lower price than it is really worth, always makes sense and will always make sense,” summarizes Javier Sáenz de Cenzano.
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