Some may be saying this, while others have been more generous by saying that value investing may be moribund. I am far more positive though. You may say that is not a surprise as a “Value” investor, but I am genuinely enthused by the opportunities out there and continue to find good actionable ideas across countries, sectors, and industries.
The lone guy in the corner of the party
Of course, MSCI Value underperformance versus MSCI World index is now unprecedented in recent decades, in both its duration and magnitude, and I find myself being the guy that no one wants to speak to right now. Historically, it doesn’t look good, with the regime extending back to the end of 2006 with a performance shortfall of over 30% versus the MSCI World index. That is a two-standard-deviation event, and it is not pretty.
A large part of the “Growth” rally has been due to the strong returns of big-cap tech stocks, the “FAANGs,” which have a substantial weighting in the MSCI World index. However, as we have increasingly seen, there is evidence of a cooling off across popular technology stocks, especially with it being an extremely crowded space.
Therefore, there is more encouragement and we are starting to see the clouds part a little for value investing. But we are not reliant on a weaker performance of growth stocks, or indeed a yield curve steepening (which some have cited as a reason for value to make a comeback). Indeed, recent economic and market events (rise in volatility) have added fuel to the debate as to whether the tide could be turning for “Value.” As our last piece (Style Regime Changes—Lessons From History) indicated, though, we do not believe that there is any one particular factor or catalyst that will see value investing once again reassert itself. Instead, I have been focused on my day job of finding undervalued stocks that can potentially deliver alpha for my clients.
Seek and you shall find
I have been concentrating on what I can control, and that is strong stock picking. Even through this challenging period for value investors, I have delved deeper to find the best opportunities for the portfolio.
For example, for the first time in a couple of years, I have found compelling value propositions in the United States. The U.S. has been a longstanding underweight for our Global Value portfolio as valuations have largely been far too rich. But more recently, we have been able to buy into some attractive entry points and are now just shy of the benchmark’s 60% allocation.
In particular, as the debate around oil prices and the future of the energy sector have continued, I have taken a deeper look at some of the affected businesses in the hunt for undervalued opportunities with potential to rerate. The oil services industry is one area of the market that looks particularly cheap to me, and I have recently increased the exposure here as I identified stocks with compelling bottom-up stories.
Financial stocks account for the portfolio’s largest absolute position, and here I have stretched the longstanding overweight position as I have become more bullish on regional banking outlooks. My largest positons comprise high-quality U.S. banks, and more recently I have been finding good value in European financials, where I have identified high-growth dynamics or positive idiosyncratic stories. I also like the insurance sector with the exposure spread across U.S. and Europe. The largest position here in the U.S. is an insurance powerhouse, which enjoys leading positions across its major business lines and we believe is well positioned to benefit from rising interest rates and shifting demand for property and casualty insurance.1
Across the Pacific Ocean, we have long viewed Japan as a fertile market for value names as the investing backdrop has become increasingly shareholder-friendly, with businesses making meaningful improvements to corporate governance and capital allocation policy. But, while valuations generally remain attractive, they are also becoming more divergent. Because of that, I have moved to a more neutral position in Japanese stocks and am driven by more individual investment cases. In particular, I like the consumer story in Japan so I have more domestically focused names.
Focus on the fundamentals, but be willing to adapt
As I have stated before, patience is the perennial friend of the value investor. Given this, it is important both to stay the course through market uncertainties, but also to balance your approach to value investing. One key foundation to my approach is the ability to stay engaged with stocks during periods of distressed sentiment in order to potentially benefit from a transition to a better outlook. Here I have enjoyed some good outcomes in recent years.
Importantly, I continue to consider a longer-term view than the market, searching for attractive entry points by looking through what we view as shorter-term, cyclical pressures. In the same vein, I am swift to sell stocks that I believe have reached fair value targets.
Looking at the Value/Growth debate from a higher level, when I observe past occurrences when Value has reasserted itself, they cannot consistently be attributed to any one development in the external environment (steepening yield curves, inflation, etc.). They can play a part at particular times, but a more consistent influence on when regimes change occur are more endogenous factors, namely market dynamics and valuations.
Therefore, as a fundamental investor focusing on specific stocks, my conviction in value investing is based upon the opportunities that I observe on the ground rather than higher level sector composition considerations. At the same time, as some sky-high growth stock valuations come down, especially across the technology sector, we may see an opportunity for a turn in the value/growth cycle.
So getting back to the original question, “Is value investing dead?”: The answer is a firm no. The only caveat to that statement is that in this current environment, where everyone is seeking growth and value investing is out of favor, only those investors with the ability and resources to find the best stock ideas will succeed.
1As of May 31, 2018. [Return to Text]
Key Risks—The following risks are materially relevant to the strategy highlighted in this material: Transactions in securities of foreign currencies may be subject to fluctuations of exchange rates which may affect the value of an investment. The portfolio is subject to the volatility inherent in equity investing, and its value may fluctuate more than a portfolio investing in income-oriented securities. The portfolio has increased risk due to it's ability to employ both growth and value approaches in pursuit of long-term capital appreciation.
This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.
The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.
Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.
The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.
It is not intended for distribution to retail investors in any jurisdiction.
Australia—Issued in Australia by T. Rowe Price Australia Limited (ABN: 13 620 668 895 and AFSL: 503741), Level 50, Governor Phillip Tower, 1 Farrer Place, Suite 50B, Sydney, NSW 2000, Australia. For Wholesale Clients only.
Canada—Issued in Canada by T. Rowe Price (Canada), Inc. T. Rowe Price (Canada), Inc.’s investment management services are only available to Accredited Investors as defined under National Instrument 45-106. T. Rowe Price (Canada), Inc. enters into written delegation agreements with affiliates to provide investment management services.
DIFC—Issued in the Dubai International Financial Centre by T. Rowe Price International Ltd. This material is communicated on behalf of T. Rowe Price International Ltd. by its representative office which is regulated by the Dubai Financial Services Authority. For Professional Clients only.
EEA—Issued in the European Economic Area by T. Rowe Price International Ltd, 60 Queen Victoria Street, London EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. For Professional Clients only.
Hong Kong—Issued in Hong Kong by T. Rowe Price Hong Kong Limited, 21/F, Jardine House, 1 Connaught Place, Central, Hong Kong.
T. Rowe Price Hong Kong Limited is licensed and regulated by the Securities & Futures Commission. For Professional Investors only.
New Zealand—Issued in New Zealand by T. Rowe Price Australia Limited (ABN: 13 620 668 895 and AFSL: 503741), Level 50, Governor Phillip Tower, 1 Farrer Place, Suite 50B, Sydney, NSW 2000, Australia. No Interests are offered to the public. Accordingly, the Interests may not, directly or indirectly, be offered, sold or delivered in New Zealand, nor may any offering document or advertisement in relation to any offer of the Interests be distributed in New Zealand, other than in circumstances where there is no contravention of the Financial Markets Conduct Act 2013.
Singapore—Issued in Singapore by T. Rowe Price Singapore Private Ltd., No. 501 Orchard Rd, #10-02 Wheelock Place, Singapore 238880. T. Rowe Price Singapore Private Ltd. is licensed and regulated by the Monetary Authority of Singapore. For Institutional and Accredited Investors only.
Switzerland—Issued in Switzerland by T. Rowe Price (Switzerland) GmbH, Talstrasse 65, 6th Floor, 8001 Zurich, Switzerland. For Qualified Investors only.
USA—Issued in the USA by T. Rowe Price Associates, Inc., 100 East Pratt Street, Baltimore, MD, 21202, which is regulated by the U.S. Securities and Exchange Commission. For Institutional Investors only.
T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc. © 2018 T. Rowe Price. All rights reserved.