Important legal information

The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.

The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.

Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is Robeco Switzerland AG, Josefstrasse 218, 8005 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.

Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/Robeco Switzerland product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/Robeco Switzerland offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.

This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.

I Disagree
Five reasons why value will be back with a vengeance

Five reasons why value will be back with a vengeance

24-03-2016 | Insight

Value investors have had a rough ride over the past 18 months, but the tide may now be turning due to five major catalysts, says US fund manager Mark Donovan.

  • Mark  Donovan
    Mark
    Donovan
    Chief Executive Officer at Boston Partners
  • David  Pyle
    David
    Pyle
    Portfolio Manager Boston Partners Large Cap Value

Speed read

  • Value stocks have fallen as investor seek ‘expensive defensives’
  • Five catalysts from oil to earnings surprises are now emerging
  • Large Caps are seen leading the reversal once sentiment changes

Amid fears over the global economy since the end of 2014, ‘expensive defensive’ and ‘glamorous growth’ stocks have been sought by investors seeking either perceived safety or higher earnings. The ‘sweet spot’ that is value stocks – those companies whose share prices do not fully reflect their earnings potential – has been largely shunned.

But better times may now lie ahead, particularly for the big established companies which are likely to lead earnings growth in the coming months and years, says Donovan, co-portfolio manager of the Robeco Boston Partners US Large Cap Equities fund.

As a long-time bottom-up value investor, Donovan follows the Boston Partners ‘three circles’ philosophy of only buying stocks which display the core value element, along with strong business fundamentals and momentum – where the company is deemed to be getting better rather than worse, and so can benefit from share price improvements.

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

Late-cycle market behavior

“The narrow, growth-driven market environment over the past 18 months has been inhospitable to our style of investing,” says Donovan, who manages the US Large Cap fund with David Pyle. “This is typical of late-cycle market behavior which often creates the conditions for a strong reversal, particularly in unloved areas. However, there are now several market catalysts that may precipitate such a reversal.”

Donovan sees five major catalysts that could now place the odds in value’s favor: 

  • A bottoming in the oil price: This has hit the US energy sector hard, with looming bankruptcies, capital expenditure cuts and layoffs, as oil fell from a peak of USD 130 a barrel in 2014 to as low as USD 26 in recent months. Now there is potential for supply cuts from OPEC and other non-OPEC nations to drive the price higher. 
  • Waning dollar strength: A strong greenback hurts US exporters and cost S&P companies USD 9 dollars in earnings per share in 2015 against an earnings base of approximately USD 118, according to Fundstrat. As dollar strength wanes, what was a headwind to companies reporting revenue growth will become a tailwind.
  • Value differentials: Value/growth differentials are stretched at approximately1.5 to 2 standard deviation points from the mean, according to Empirical Research Partners data, and are not sustainable. This can clearly be seen in the valuation differentials of the likes of US large caps Facebook, Amazon, Netflix and Salesforce.com at 3.3x market averages at the end of 2015. A ‘reversion to the mean’ helps value stocks.  
  • US profit surprises. The very essence of value investing is picking those companies whose earnings are seen exceeding what is priced into their shares. Many ‘unloved’ value companies end up surprising on the upside, producing a premium for the fund. If economic growth can rebound from the low levels of the first quarter of 2016, there is will be considerable operating leverage that could drive earnings across many industries.
  • Fed time lag: Markets typically rise following a three-month adjustment period to a policy move by the US central bank before they move. As the Fed raised rates in December 2015 for the first time in almost a decade, this suggests that the adjustment period will end around March or April (see chart below).

Present and future sentiment

The impact of a reversal in sentiment could be considerable, particularly as many of the market’s wobbles have been caused by exaggerated fears over a growth slowdown in China, a US recession, and even another financial crisis, Donovan says. “While growth expectations have undoubtedly been downsized, the worst fears rarely materialize, and there are counter arguments for many; the low oil price, for example, has benefits as well as drawbacks,” he says.

“As is often the case, short-term market action is driven by sentiment, which is responding very negatively to concerns of slowing global growth and the potential for an economic crisis. However, segments of the US market such as the banks, commodities and industrial companies are being valued as if there will be a significant recession. This is creating ‘three circle’ opportunities in Financials, Industrials and Energy that Boston Partners is selectively pursuing.”