latamen
Graph of the week

Graph of the week

22-05-2020 | Insight

Is value investing dead?

  • Steef  Bergakker
    Steef
    Bergakker
    Senior Portfolio Manager

In order to make any sense at all of our complex world, we divide things into all kinds of categories based on common characteristics. The same applies in the world of investment. Investors distinguish between different sectors, countries, small and large listed companies, value and growth stocks, and so on.

Sometimes, this categorization yields useful and beneficial insights; sometimes it doesn't. And sometimes a change in our environment causes a categorization that has long been useful and beneficial to lose its value.

For decades, the distinction between value and growth stocks was highly valuable. Value stocks, usually defined as shares with a low price-to-book valuation, generated substantially higher long-term returns than growth stocks with a high price-to-book valuation.

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

US value versus growth, relative performance (log values)

Source: BofA Global Investment Strategy, Ibbotson, Fama-French

The difference was so great and statistically significant that the value characteristic was considered a systematic factor for determining long-term returns.

Has the tide turned?

But since the global financial crisis of 2008/09 and, in fact, slightly before that, growth stocks have been doing much better than their value counterparts. Particularly in the last few years, a chasm has opened between the returns of value and growth stocks – to the benefit of the latter category.

This long period of value underperformance has seriously damaged confidence in the validity of the value factor. So, isn't it about time we concluded that value investing is dead?

If we look at the above graph, in which a rising line indicates value stock outperformance and a falling one growth stock outperformance, we can see that value strategies have more frequently shown long periods of extreme underperformance in the past. This was the case in both the 1930s and the 1990s.

Yet every occurrence was followed by a spectacular comeback. Therefore, it’s too early to write off value stocks. On the other hand, we should definitely not rule out that the change in circumstances this time around is so great that value stocks have indeed permanently lost their ability to generate outperformance.

Book value

A growing problem is, for example, that the book value - the traditional workhorse of value strategies - is becoming less representative of the value of modern companies’ production resources. Increasingly, these comprise intangible assets such as licenses, copyrights, patents, trademarks, brand names and customer data - which, unlike factories and machines, are difficult to quantify in traditional book values.

Another potential problem is that in the past, value strategies have delivered their best performance in times of high economic growth and rising prices. In other words, when growth was not scarce. In periods of low economic growth and inflation – such as the 1930s, the period since the global financial crisis, and economic recessions – growth stocks usually did much better.

The past century, especially the second half, was a period of exceptional economic growth. There was a sixfold increase in the world's population and yet the average per capita income across the globe grew significantly. If, as various economists expect, we are heading towards a period of lower but historically more normal economic growth, investors may remain charmed by growth stocks for much longer.

More art than science

That demonstrates that what we are dealing with is a case of tea leaf reading. Neither a miraculous recovery nor a final curtain can be ruled out. And this is the sore spot of the financial profession: we are very good at finding, testing and extrapolating correlations from the past, but not overly successful at devising robust, theoretical explanations for why and exactly under which conditions these correlations occur.

Basically, forecasting with some degree of precision is still beyond our reach. Investing is still more of an art than a science.

Subjects related to this article are:
Logo

Important information

The Robeco Capital Growth Funds have not been registered under the United States Investment Company Act of 1940, as amended, nor or the United States Securities Act of 1933, as amended. None of the shares may be offered or sold, directly or indirectly in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”)). Furthermore, Robeco Institutional Asset Management B.V. (Robeco) does not provide investment advisory services, or hold itself out as providing investment advisory services, in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act).

This website is intended for use only by non-U.S. Persons outside of the United States (within the meaning of Regulation S promulgated under the Securities Act who are professional investors, or professional fiduciaries representing such non-U.S. Person investors. By clicking “I Agree” on our website disclaimer and accessing the information on this website, including any subdomain thereof, you are certifying and agreeing to the following: (i) you have read, understood and agree to this disclaimer, (ii) you have informed yourself of any applicable legal restrictions and represent that by accessing the information contained on this website, you are not in violation of, and will not be causing Robeco or any of its affiliated entities or issuers to violate, any applicable laws and, as a result, you are legally authorized to access such information on behalf of yourself and any underlying investment advisory client, (iii) you understand and acknowledge that certain information presented herein relates to securities that have not been registered under the Securities Act, and may be offered or sold only outside the United States and only to, or for the account or benefit of, non-U.S. Persons (within the meaning of Regulation S under the Securities Act), (iv) you are, or are a discretionary investment adviser representing, a non-U.S. Person (within the meaning of Regulation S under the Securities Act) located outside of the United States and (v) you are, or are a discretionary investment adviser representing, a professional non-retail investor. Access to this website has been limited so that it shall not constitute directed selling efforts (as defined in Regulation S under the Securities Act) in the United States and so that it shall not be deemed to constitute Robeco holding itself out generally to the public in the U.S. as an investment adviser. Nothing contained herein constitutes an offer to sell securities or solicitation of an offer to purchase any securities in any jurisdiction. We reserve the right to deny access to any visitor, including, but not limited to, those visitors with IP addresses residing in the United States.

This website has been carefully prepared by Robeco. The information contained in this publication is based upon sources of information believed to be reliable. Robeco is not answerable for the accuracy or completeness of the facts, opinions, expectations and results referred to therein. Whilst every care has been taken in the preparation of this website, we do not accept any responsibility for damage of any kind resulting from incorrect or incomplete information. This website is subject to change without notice. The value of the investments may fluctuate. Past performance is no guarantee of future results. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. For investment professional use only. Not for use by the general public.

I Disagree