It’s been a rough time for value managers. Has quantitative easing killed off value as a strategy? Or can it stage a comeback?
- Contrarians would suggest that value investing may be due for a comback
- Quantitative easing continues to create a tough environment for the value approach
- Value investing has been through these periods of existential crisis before and always come back strongly
News of Mark Barnett’s departure from Invesco has prompted a few sage investors to speculate that this might be a contrarian signal: his value investing style may be due for a resurgence. After a long time in the wilderness, could value come back in style?
Certainly, it wouldn’t be the first time a high profile manager has given up just at the point where their style came back. Tony Dye left Philips & Drew just as his gloomy predictions for the end of the internet bubble came true. However, there just as many who sunk without trace whose predictions never came to fruition.
Is value, as some have suggested, really at all-time lows and ready for a change of fortune? Surely a more discerning market should favour stodgy, reliable companies with good balance sheets over the sexier, but more expensive technology companies? This environment should have brutally exposed those companies living on air, supported by cheap debt in a low interest rate environment. At the same time the valuation gap between value and growth indices can hardly be ignored.
However, it doesn’t appear to be happening that way. Instead, technology stocks have become more expensive, while investors continue to overlook the stodgy unfashionable businesses that tend to appear in a value investor’s portfolio.
There is some logic to this: the discount rate has been pushed – by some estimates – around 20-25% lower. That means every pound of revenue made by, say, Google or Amazon is that much more valuable. This is a low growth world, so growth matters. Equally, it is a winner takes all environment: the technology giants continue to move into more areas, gobble up the little fish and grow more powerful.
There is also the disruption problem. From Covid-19 to digitisation, companies can find that they are obsolete almost overnight. This changes the way investors look at incumbents. They are not simply unfashionable, but in terminal decline.
However, there are those who will argue that value investing has been through these periods of existential crisis before and always come back strongly. In many cases, there has been no immediate catalyst, just a recognition by investors that perhaps valuation does matter after all.
The key perhaps is to hedge your bets. There are value managers that have managed to perform even though their style is out of favour. Those are the ones to stick with – they may not be the purists, but the pain may not be as profound.