Value investing can be a “great driver” of long-term returns, according to a member of the UK financial institutions and strategic accounts team at Schroders.
Phil Robotham said, during a Federation of European Independent Financial Advisers (Feifa) masterclass seminar in Prague, that his team believes focusing on out-of-favour, global stocks with low valuations is a perfect way to find success in turbulent markets.
“Value investing is the art of buying stocks which trade at a significant discount to their intrinsic value” Robotham said. “Value investors achieve this by looking for companies on cheap valuation metrics, typically low multiples of their profits or assets, for reasons which are not justified over the longer term. This approach requires a contrarian mindset and a long-term investment horizon.
“Over the last 100 years a value investment strategy has a consistent history of outperforming index returns across multiple equity markets”.
Taking the emotion out of it
Value investing seeks to exploit the “irrational behaviour of emotional investors”.
Robotham explained that emotion is a constant feature of investment markets through time and whilst the companies available to stock market investors change from decade to decade, the human nature of the investors themselves doesn’t.
Fear and greed remain ever present and frequently lead to poor investment decisions based on perception and emotion rather than reality.
Feifa chief executive, Paul Stanfield, told International Adviser: “I’d say that although value investing seems simple and sensible, it is much easier to say than do in practice.
“It requires a very unemotional approach and is one of the reasons that investors with financial advisers tend to enjoy better returns – as the adviser is able to be more dispassionate and logical about the whole investing process.
“Therefore, the benefit to the client is performance that is far less tainted by emotion – and the adviser has a means of showing another area where they add worth for the client.”
Value investing as a price-sensitive process
Andrew Cormie, portfolio manager at Eastspring Investments, also weighed into the debate by telling IA that value investing stems from the presence of investors in the market pursuing momentum and buying stocks with unrealistic growth expectations.
“We see value investing as a price-sensitive process that takes advantage of asset mis-pricing arising from investor behavioural traits,” said Cormie. “While recognising that markets are generally efficient longer term, we believe that market mis-pricing occurs because human characteristics (such as fear and greed) can prevent investors from always assessing investments rationally, which gives rise to pricing anomalies.
He also spoke about the four steps of value investing:
– First, strive to identify, manage and exploit behavioural biases that cause short-term emotional price volatility;
– Second, pay attention on identifying a company’s path to sustainable earnings, including the hurdles and impediments it may face and understanding market concerns.
– Thirdly, understand that uncertainty and fear often bring emotional stock price movements unjustified by future earnings potential, then look to take advantage of those price disruptions in the market. This is especially in instances in which there are long-term prospects that the market has ignored.
– Finally, follow a highly disciplined approach which explicitly separates investment decisions from those positive feedback price mechanisms that gives rise to herd behaviour. This allows a repeatable process to generate potential positive alpha over time.