By Peter Boyle
“Value” as an investment style found itself increasingly out of favour as the post 2008 bull market played out. It now looks like value could be back on many investors’ radars.
Concerns over China and the US economy along with the policies of central banks (i.e. interest rates) have all had a contributing role in putting the brakes on equity markets in 2016. This is, however, a continuation of 2015 when markets narrowed in the latter half, bringing an end to the broad based recovery from which most equity investors benefited post-2008. By the end of 2015 only a handful of momentum and growth stocks actually drove returns (think Nifty Nine, FANGs (Facebook, Amazon, Netflix and Google), while the rest of the market remained flat.
As a result investors have been left searching for alternatives. The problem is that there are few safe havens and currently, all asset classes look expensive. The exception appears to be “value” stocks, largely ignored over the last few years as the markets raced ahead. With defensive characteristics, counter-cyclical return profiles and valuation starting points which imply significant upside from here, it is not surprising to see investors moving towards value equities. So far this year, value has outperformed the broader market.
Of course, value can be defined in a myriad of ways. In general, value investing is understood as “buying unloved companies at a discount to their intrinsic worth and waiting for their fortunes to change”. When selected well and combined properly, value stocks can provide an excellent foundation for a robust, differentiated, longer term portfolio. After a prolonged period of underperformance, value has built up considerable latent energy which, if history is any measure, could deliver years of outperformance.
As investors are well aware, strategic global equities allocations are most powerful when the underlying stocks are sufficiently differentiated. One way to achieve this is to allocate across equity styles – from growth to value. With complimentary and yet distinct performance profiles, growth and value both have a place in any well-diversified global equities allocation.
With the first quarter of 2016 behind us and recent volatility looking set to continue, the need for effective diversification has been brought into focus. Those who allocated predominantly to growth strategies in the past will have done very well over the last few years. Growth may well continue to drive markets from here, it may not. Investors may wish to consider the strategic importance of holding long term value as part of a well-rounded investment strategy.
Peter Boyle is managing director of Kennox Asset Management
