Patience pays in value investing
Global fund managers see huge opportunity in cheaper shares
Growth shares have had their place in the sun for more than a decade, but the high price of these shares points to a significant opportunity for cheap value shares globally to deliver over the next 10 years.
Three global investment managers make a strong case for investing in value shares at a time when most investors are chasing what they consider the safe, resilient stocks in tough market conditions.
"You rarely see so many opportunities to score tries in value investing as now," says Diana Strandberg, senior vice-president and director of international equity at Dodge & Cox, an investment management firm in San Francisco. She was speaking at a Morningstar Investment Conference in Cape Town this week.
It is impossible to predict when the time will arrive for value shares to shine, but now "is a potent time" to invest in them, she says.
If you pay the wrong price for a stock, you will not make money
Nicholas Kirrage, co-head of the global value team at global investment manager Schroders, says investors looking to make money over the next 10 years should look at the cheapest parts of the market.
When you look at those sectors, you may feel uneasy because there will be reasons these stocks are cheap. The question you should ask is whether those reasons are permanent or will they change over time.
Just because a stock is cheap doesn't mean it's a bad business, Alex Cutler, a co-manager and director of Orbis Investments, says in an article on the Allan Gray website.
By conducting research, investment managers can sometimes find stocks that are cheaper than the average stock and have better growth, profitability and balance sheets than the average company, he says.
Significantly, this is the first period of under-performance for the value style of investing seen in a generation, which highlights that this potentially is a much bigger opportunity than normal, Kirrage told the Allan Gray Investment Summit earlier this year.
Cutler says that at a low enough price, almost any asset can be a good investment, and at a high enough price, any asset, no matter how amazing the product, growth or management, can be a bad one. Exceptional growth often fades, and tough periods often pass, he says.
Sometimes, the expensive stocks in the market are called "growth" stocks, but it's important to understand how the investment styles are defined. Growth stocks are conventionally defined by their high valuations - paying no attention at all to the companies' actual growth, he says.
Investors often take differences between companies too far. They get excited about an especially fast-growing or profitable or predictable company, and they start to believe it will maintain its prodigious, profitable, predictable growth forever, he says.
If the story is exciting enough, the company might look like a good investment at any price. On the other hand, investors can get too dour about other companies, thinking they will forever struggle to grow or earn decent profits - or that the future of the business is too hard to predict.
If the story is scary enough, the company might look "uninvestable" at any price. That is a mistake, and the reason value investing works over the long term, he says.
According to Strandberg, an analysis of the difference in the valuations of growth shares and value shares over 44 years shows that the spread between the two share types is the highest it has been since the
technology share bubble burst in March 2000.
In each of the 38 times over the past 44 years the spread has been at least this wide, value shares have outperformed growth shares over the next five years. When the disparities between the two types of shares become this dramatic, the likelihood things could turn around is drastically increased, she says.
The price at which you start your investment is the most powerful determinant of long-term investing. It is more important than economic growth, growth in company profits or other measures that investors may consider, says Strandberg.
We spend 90% of our time talking about macroeconomics or politics or what com-panies are doing and how industries are faring, but by far the most important factor in investment success is what you pay for your investments, says Kirrage.
Even if you buy the best company, the best sector, the best management team, or the best growth opportunities in the world, if you pay the wrong price, you will not make money, he says.
Invest in a strategy that is out of favour today, says Kirrage. You may find it challenging to invest in companies while they are struggling, but some of the greatest rewards come from being brave and taking the opportunity when it looks difficult to do.
Value investing requires patience and persistence over a long time horizon for that value, or incremental outperformance, to materialise.
But, says Strandberg, you have to be invested in value shares to enjoy the turnaround or you will miss it.