Growth has outperformed value over the past decade. The only real exception to this trend was in 2016 when value momentarily outperformed by double digits. Since then, growth has rallied strongly, driven primarily by a handful of mega-cap darlings. This resulted in the widest valuation spreads between growth and value on record, largely triggered by the significant performance dispersion over the last two years ending 31 December 2020, as seen in Figure 1.
In fact, this period is comparable to prior phases of multiple expansion, such as the Nifty Fifty and the dot-com eras, when growth stocks, such as Hewlett-Packard (HP) in the 1990s, surged. Since then, HP has matured into a value stock following a long, wintery period for its investors. Therefore, we believe value investors are well-positioned for a mean reversion in share prices, particularly if the growth stories linked to some of the expensive stocks fail to materialize.
Research shows that value helps to reduce drawdowns in multi-style portfolios in the long run
The value style is an effective diversifier in multi-manager portfolios. It has a negative historical correlation with trending markets and just a slightly positive historical correlation with high-quality or low-risk investing. Furthermore, research shows that value helps to reduce drawdowns in multi-style portfolios in the long run (i.e. value can function as ‘bubble hedge’) and improves risk-adjusted returns, even when we assume there is no positive value premium.1 Besides the overwhelming academic evidence in favor of value, we believe investors need to consider whether it is prudent to continue to bet against the style. In our opinion, the diversification benefit of allocating to value is reason enough to consider it in your portfolio.
Beyond considering an allocation to value, it can be challenging to choose the correct value stocks or the appropriate value strategy for your portfolio. If you just search for large-cap funds with ‘value’ in their names in Morningstar, you will find an overwhelming number of funds. If we analyze their styles, however, we find that many of these funds do not actually offer high value exposure. Some may offer partial value exposure. Others might have offered it in the past, but experienced strong style drifts.2 Ultimately, many ‘value’ funds do not offer deep, and more importantly, consistent value exposure over time. We believe, however, this is crucial when constructing a diversified, multi-style portfolio.
Indeed, we build deep and consistent value portfolios, but remain cognizant of potential value traps. The Robeco Value Equities strategy implements a sophisticated approach to harvest the value premium, which results in a portfolio of well-diversified value stocks. Risk awareness is integral to the investment process. The investment team aims to steer clear of value traps (including unrewarded distress risk) by incorporating signals, such as the probability of default and profitability, as well as other indicators, like earnings revisions.
Generic value strategies are often considered unsustainable as they are typically tilted towards asset-heavy sectors such as energy and materials. It is possible, however, to build sustainable value portfolios with reduced carbon footprints.
To avoid concentration in less sustainable companies in the Robeco Value Equities strategy, we incorporate environmental, social and governance (ESG) considerations in every step of the investment process. For instance, we establish that the portfolio’s ESG score is higher than that of the market index. We also ensure that its footprint on carbon, waste and water is lower than that of the benchmark.
In fact, we implemented an innovative methodology in 2019 to reduce the environmental footprint of our portfolio. While conventional value strategies (e.g. using book-to-price measures) often have an environmental footprint that is more than 50% above their respective benchmarks, our enhanced valuation measures do not exhibit tilts to high emitters.3 In 2020, we took another step by adding fossil fuels (e.g. arctic drilling, oil sands and thermal coal) to our exclusion list.
Prolonged periods of value underperformance, due to the expansion of valuation multiples, are historically followed by sharp rallies
Despite the protracted underperformance of value, there are good reasons to allocate to the style. Prolonged periods of value underperformance, due to the expansion of valuation multiples, are historically followed by sharp rallies. More recently, the announcement of successful Pfizer-BioNTech vaccine results on 9 November 2020 has triggered a broad rotation from growth into value, perhaps signaling the start of the long-awaited value comeback. Although timing equity markets and factors is extremely difficult, we believe the longer-term outlook for value is attractive.
1Please see: Van Vliet, P., and Baltussen, G., August 2020, “Will value survive its long winter?”, Robeco article.
2Please see: Baltussen, G., Rohof, J., and Hagens, J., March 2021, “Value investing: Now…but how?”, Robeco article.
3Please see: Swinkels, L., Ūsaitė, K., Zhou, W., and Zwanenburg, M., October 2019, “Decarbonizing the Value factor”, Robeco article.
The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.
Please read this information carefully.
This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. The Company does not hold client assets and is subject to the licensing condition that it shall seek the SFC’s prior approval before extending services at retail level. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.
2. Important risk disclosures
2. Important risk disclosures Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:
3. Local legal and sales restrictions
The information contained in the Website is being provided for information purposes.
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. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.
4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.
5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.
6. Third party websites
This website includes material from third parties or links to websites maintained by third parties some of which is supplied by companies that are not affiliated to Robeco. Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage. Third party off-site pages or websites are provided for informational purposes only.
7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.
8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.
10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong.