The stock market's bargain hunters continue to believe

Since 2009, the stock markets have been moving in only one direction: up. Strangely enough, one category of investors systematically performed poorly during that period, namely the value of value investor. They seek refuge in stocks that have fallen out of the market's favor and are therefore trading below the price they are actually worth. “We are mainly looking at companies and sectors whose share price has been penalized by negative sentiment or macroeconomic developments, but are still profitable and financially healthy,” says Javier Sáenz de Cenzano of Spanish asset manager Azvalor. It manages around 1.7 billion euros based on the value strategy. “The key is buying stocks cheaply and waiting for the market to reassess them to their true value.” The value investor is the financial markets' bargain hunter. The counterpart is the growth investor. It is willing to pay more for a share, with the prospect of being amply rewarded if the company grows and makes more profit in the future.

Value is dead

The ultimate value investor is Warren Buffett. According to many, his success proves that value investing is a superior strategy. But over the past ten years, that has proven to be anything but. For example, American asset manager O'Shaugnessy Asset Management calculated that the growth strategy has yielded 136 percent more return than the value strategy since 2007, which represents 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 investment world.

For Andrew Evans, who manages Equity Value Funds for asset manager Schröders, there are few reasons to panic. “Our customers often ask about the cause of the long underperformance of value,” he says. “But 150 years of investment history show that value investing outperforms the market average in the long run.” According to Evans, this is due to people's herd behavior. “When things go well, investors pay too much; when things go bad, they walk away and miss opportunities. Value investing capitalizes on people's fear and greed. Moreover, it is not the first time that value has performed relatively less.”

“The core of value investing is buying stocks cheaply and waiting for the market to reassess 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 on the stock market, because all prices have risen too. “To achieve good results with the value approach, the business cycle must go up and down. This way, you can benefit from exaggerated market reactions,” Evans explains. “However, we are now in an unprecedented long upward cycle, which is constantly being extended, for example due to the central banks' purchase programmes.” Kris Hermie, fund manager at the Belgian Value Square, agrees: “Value works best during periods of economic recovery.”

Monetary experiment

Central banks' buying programs have allowed much of the money pumped into the financial system to flow into the stock markets. “This unprecedented monetary experiment is the main reason why the underperformance of value is so intense and lasts so long,” confirms Javier Sáenz de Cenzano.

In addition, the low interest rate means that a lot of assets are looking for extra returns. It thinks it finds that in stocks. “Investors have a lot of money left over for the possible future growth of stocks,” explains Kris Hermie. As a result, the entire stock market is highly valued, especially growth stocks. “The difference between valuations of value and growth stocks has rarely been greater,” say Hermie and Sáenz de Cenzano in unison.

The rise in the stock markets is also boosted by the explosion in passive investing via ETFs and index funds. Over the past ten years, they have had an influx of 2700 billion dollars worldwide. Skeptics call it stupid money, which just flows into certain stock indices without having any idea what those stocks are worth. “The best-known global stock index consists of 60 percent of U.S. companies, while the United States only accounts for 24 percent of the global gross domestic product,” explains Kris Hermie. “In the index of the 500 largest U.S. companies, the five largest companies are the same size as the three hundred smallest. Passive investors often don't know what they're buying, nor that most of their money goes to those big companies.”

Value performs best when the business cycle recovers after a crash
- Kris Hermie, Value Square

Hopeful signs

It's just waiting for value to start performing above average again. “We don't expect a single event to change things,” says Andrew Evans. “There is no single scenario for turning value on or off the success of value. It's often just waiting for stocks to list excessively cheaply.”

Kris Hermie sees promising signs. “Value performs best when the business cycle recovers after a crash. Currently, the business cycle barometers for industry and the service sector point to a possible decline. The prices of many cyclical companies have already fallen by 40 to 50 percent. That creates opportunities.” Azvalor, for example, sees opportunities in Brexit. “You see investors collectively fleeing from companies that may be affected by Brexit. But not all these companies will suffer equally,” explains Sáenz de Cenzano. “With the right analysis, temperament, and patience, you can benefit as an investor.”

In addition, the implementation of the value strategy also changes over time. “The definition of value is an ongoing debate, but staying true to your style is crucial,” says Kris Hermie. “It depends on many factors, but building in sufficient safety margins is the key.”

None of the three fund managers is upset by the recent poor results of the value approach. “Buying something at a lower price than it's 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