Is there any value left in value investing?

Tom Mann, Portfolio Manager at Schroders.

Tom Mann, Portfolio Manager at Schroders, explains where to find pockets of value.

Despite proving to be a reliable generator of equity outperformance during the 20th century, value investing – the art of buying stocks which trade at a significant discount to their intrinsic value – has yielded generally poor returns over the past decade. Nonetheless, deeper analysis suggests that pools of attractive value remain available to astute investors.

This is according to Tom Mann, Portfolio Manager at global asset manager, Schroders, who was speaking at the third annual Schroders Investment Symposium about the long-term case for value investing.

“Value investing is not always in favour and does not always outperform over shorter time periods. In the short term, the market is a voting machine, whilst over the longer term it tends to be a weighing machine. Over the last century, there have been many periods where buying cheap stocks has not been a short-term vote winner – the past decade has been a prime example of such a period.”

So why has value failed to perform since the financial crisis in 2007, asks Mann. “It is important to remember that value stocks are cyclical, less stable and more sensitive to the wider economy than other companies. They have therefore struggled in the long and slow economic recovery since 2007 and investors have, as a result, shunned cyclical stocks in favour of ‘safer’ secular growth stocks.

“However, this is not to say that there haven’t been pockets of value available over this period,” adds Mann. “In materials and utilities sectors, value has actually outpaced growth over 10 years and it could be argued that much of the underperformance in the value index has been due to the absence of a few big technology stocks and an overweight in banks.”

Furthermore, when comparing past earnings with the likely future growth implied by current equity valuations, Mann believes that such a dislocation in the market may be a precursor to value outperforming as expensive growth companies withdraw to lower valuations.

“Across the globe, the majority of the performance gap between value and growth can be attributed to the higher price/earnings (P/E) multiples of growth stocks and while the price of growth stocks has outstripped their higher earnings-per-share (EPS) growth, the market has largely ignored the EPS growth of value stocks.”

What this means, says Mann, is that the market currently overrates growth stocks significantly, while underrating value stocks. “Due to their popularity in recent years, growth assets such as the FAANG stocks – Facebook, Apple, Amazon, Netflix and Google (Alphabet) – have come to represent overcrowded investments with expensive valuations, while value stocks have been largely overlooked.

“Given the scale of the style’s underperformance, the potential recovery of value stocks could be a very attractive investment opportunity in today’s markets.”

Mann concludes, however, that while there are opportunities available for value-conscious investors, they need to be ready to do the necessary research. “What differentiates a good value investor from a naïve value investor is the ability to identify stocks that are temporarily impaired from stocks that are trading cheaply for a reason. Taking an active approach and exercising due diligence are therefore both crucial components of successful value investing.”