Value investing still worth hanging on to

• “Value investors have more conviction than ever.” • “Value investing allows for a contrarian view where it matters.” • “Value portfolios protect portfolio values in a downward market.”

Momentum Investments hosted a panel discussion on value investing at its Investment Summit in Cape Town on 12 November. The panel was chaired by Alec Hogg, editor and publisher of Biznews.com.

The panel consisted of some of South Africa’s top value investment managers including Adrian Clayton, managing director of Northstar Asset Management, Duncan Artus, director and portfolio manager at Allan Gray, Lonwabo Maqubela, portfolio manager at Perpetua Investment Managers and Cy Jacobs, director at 36ONE Asset Management and head of the investment team.

The subject of the panel discussion was whether to hang on to value at any cost and should value-biased investment styles now be the cornerstone of clients’ investment portfolios?

Hogg said value investing is falling out of favour given that value portfolios have significantly underperformed of late.

Clayton pointed out that investing is cyclical and the current cycle is not that positive for value investors. Following the global financial crisis, artificially depressed interest rates contributed to underperformance by value investment managers.

Yet, despite the current prolonged period of underperformance, value investing has outperformed the market over the long term.

Clayton predicted that the cycle of underperformance is nearing an end, with the interest rate and commodities cycles set to improve. For this reason, value investors have more conviction than ever.

Maqubela from Perpetua said value investing should form the core of a portfolio. He pointed out that value investing is a continuum with deep value at one end and growth at a reasonable price at the other. He said value investing allows for a contrarian view where it matters.

He further stated that value investing focuses on bottom-up investing, in other words, the investment manager looks at the company first and the economy last. This makes sense because it is impossible to predict what the economy will do. For instance, hardly anyone foresaw the global financial crisis, quantitative easing (QE), low interest rates and the decline in the oil price.

On whether investors should hang onto value investing at any cost despite significant outflows, Artus from Allan Gray advised investors not to hang onto any investment at any cost, but to know when to disinvest. He believes investors should always hold some value portfolios, as they protect portfolio values in a downward market.

Hogg said the danger for value investment managers is to be caught in value traps – shares which seem cheap but are cheap for good reason. He asked the panel to select a share that could be value trap.

Clayton proposed the listed Johannesburg Stock Exchange share, as it is under threat from other markets as well as the possibility of a second securities exchange. Artus felt MTN as well as some construction and resources companies could be value traps, while Jacobs said most of the shares on the JSE are potential traps.

Maqubela said construction companies are in trouble given government’s limited ability to spend on infrastructure, and thus potential value traps.

Artus had a very negative view on listed property, as the shares are not liquid enough. Jacobs agreed, saying vacancies are currently too low and that local property companies need to fund bigger investments outside of SA.

Hogg asked each panelist for their best share picks for the next one to three years.

Jacobs voted for Naspers, as it is a good rand hedge, with excellent technology in place and lots of space to grow. Clayton agreed, saying Naspers has a good team, further potential for cost cutting and possibly some overseas development.

Artus selected Old Mutual, as it trades at a big discount to Sanlam. He also liked Adcorp, saying its share price could double in the future.