Although value stocks started to outpace quality/growth stocks in 2016, fuelled by Donald Trump’s presidential victory, they have had a shakier start in 2017.
During Trump’s first 100 day stretch it was US growth style active funds, not value that outperformed, in general.
“The last decade proved to be a challenging time for proponents of value investing,” said Hepworth.
“There have been only three periods over the last 90 years when value has underperformed for an extended period – the Great Depression, the TMT bubble and the global financial crisis.”
But, so far, the global financial crisis has been the longest period of underperformance, he noted.
At its core, the value trade is not for the faint of heart.
“The discipline of value investing is in most part built on buying out of favour companies at a time when the share price appears to understate the long-term value of the underlying business model,” said Hepworth.
But over the long-haul, it pays to “go against the herd,” in Hepworth’s view.
Since the inception of the MSCI value, growth and world indices, value has provided greater returns over the long-term, particularly in relation to growth stocks.
“One of the clear tailwinds behind value investing over the long term, which has been evidenced by most academic studies, is mean reversion,” explained Hepworth.
“Companies trading at a discount to the fundamental value of the underlying business model do not sustain the discount indefinitely.
“Given both the length and the depth of the malaise in value investing since the global financial crisis, the potential recovery could be meaningful.”
Despite the setbacks US cyclicals have felt early this year, Hepworth thinks the conditions are still right for such a meaningful recovery.
“Looking ahead, investors will be asking whether the return of value investing last year marks a reversion to mean or a false dawn.
“We favour the former thesis on the grounds that monetary policy and inflation will have the strongest impact on value stocks.
“We believe that investors need patience and a long-term investment horizon in order to achieve long-term investment success in any market.
“The current market environment is a challenging one, but we feel confident in staying the course with our focus on searching for value investments, more so when the relationship is poised to begin shifting in favour of value after a tough decade.”
