united kingdomen
How impatience kills your value performance

How impatience kills your value performance

14-04-2016 | Column

Suppose that over the last few years value investing had outperformed, what would happen? It would be back on the radar again and investors would want to ensure their portfolios are positioned to exploit the value premium. It gives them a good feeling because many believe in value investing and admire great value investors such as Benjamin Graham and Warren Buffett. There is also a tremendous amount of academic literature that confirms the existence of the value premium.

  • Maarten  Polfliet
    Maarten
    Polfliet
    Portfolio Manager

But before they overenthusiastically start trying to capture that value premium, they should learn from the mistakes often made by investors. So what goes wrong? Investors convince themselves that their search for value managers is based on academic evidence and the great performance of famous value investors. Or is it the recent good performance of value stocks? They are happy with the managers they have chosen to provide the consistent value exposure they seek. But then, after a while value investing starts to lag behind the market and those investors that have so proudly recruited a value manager start to get nervous.

Stay informed on Quant investing with monthly mail updates
Stay informed on Quant investing with monthly mail updates
Subscribe

Candy store

Why does this happen? Well, in the same way that children behave in a candy shop, these investors focus on the historically strong returns of value stocks and admire the intelligence and creativity of the great value investors! But they forget just how patient these investors have had to be to achieve their great returns and how irregular the performance of value stocks can be over time.

They also forget the extent to which Warren Buffett’s returns lagged during the IT bubble at the end of the 1990s (when people made fun of him and even wrote him off because he failed to jump on the bandwagon) and also how strongly his performance recovered.

And last but not least, they overlook the length of investment horizon you need to achieve great value returns, and we’re not talking about a short 3-year performance evaluation period in this case.

So entering a value strategy after a few years of good performance, backed by the sound philosophy and results of great value investors and academic proof, is not enough especially if you fire your value manager again after a few years of lagging performance. Impatience ‘kills’ the potential results that looked so promising when you selected your value manager.

Look in the mirror

Not only do you fail to give yourself the chance to capture the value premium, worse still, you probably achieve returns that are far below those of the market. This is a tragedy for your clients – after all it’s their money that is being eaten away! And all because you didn’t have the character to be patient and stick to your highly promising value investment philosophy.

‘I’m convinced that if impatient investors really take a good look at themselves, they will see where they went wrong’

If you can’t handle the irregular return on value stocks, don’t have enough patience, are afraid of difficult questions from clients, your manager or your investment committee, be realistic and stop recruiting value managers. Start investing in an index fund, cut costs (fire people), reduce your career risk (if you still have your job, that is!) and deliver a better return for your clients.

I’m prepared to admit that I can’t provide the same amount of empirical evidence to prove this investor impatience as I can give you on the existence of the value premium itself. But I’m convinced that if impatient investors really take a good look at their investment behavior, they will see where they went wrong. In the end, there’s only one major advantage related to their behavior – it keeps the value premium alive and kicking!

Subjects related to this article are:

Disclaimer

Please read this important information before proceeding further. It contains legal and regulatory notices relevant to the information contained on this website.

The information contained in the Website is NOT FOR RETAIL CLIENTS - The information contained in the Website is solely intended for professional investors, defined as investors which (1) qualify as professional clients within the meaning of the Markets in Financial Instruments Directive (MiFID), (2) have requested to be treated as professional clients within the meaning of the MiFID or (3) are authorized to receive such information under any other applicable laws. The value of the investments may fluctuate. Past performance is no guarantee of future results. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. 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.

In the UK, Robeco Institutional Asset Management B.V. (“ROBECO”) only markets its funds to institutional clients and professional investors. Private investors seeking information about ROBECO should visit our corporate website www.robeco.com or contact their financial adviser. ROBECO will not be liable for any damages or losses suffered by private investors accessing these areas.

In the UK, ROBECO Funds has marketing approval for the funds listed on this website, all of which are UCITS funds. ROBECO is authorized by the AFM and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.

Many of the protections provided by the United Kingdom regulatory framework may not apply to investments in ROBECO Funds, including access to the Financial Services Compensation Scheme and the Financial Ombudsman Service. No representation, warranty or undertaking is given as to the accuracy or completeness of the information on this website.

If you are not an institutional client or professional investor you should therefore not proceed. By proceeding please note that we will be treating you as a professional client for regulatory purposes and you agree to be bound by our terms and conditions.

If you do not accept these terms and conditions, as well as the terms of use of the website, please do not continue to use or access any pages on this website.

I Disagree