Talking Point

Global Active Value positioned for recovery…

30/04/2009

Value investing – the practice of buying stocks that appear underpriced and holding them until the market realises their true worth – has been one of the most successful equity strategies over the long run but can suffer short term periods of underperformance particularly during times of economic stress. In contrast to the widely held view that high dividend yields provide a floor on company share price valuations, the reality has been that Value tends to deliver lumpy returns with a disproportionate amount of its best returns being generated during cyclical recoveries.

Many studies show a premium attached to Value investing and it is during times of distress that opportunities arise and set investors up for the next rebound. Periods of underperformance such as the recessions of 1980, 1990 and early 2000 are typically followed by strong outperformance. Investors need to constantly remind themselves of the importance of being contrarian. The chart below shows the relative performance of Value versus MSCI World and one can clearly see how Value struggles during periods of heightened risk but subsequently recovers strongly to generate a positive long run excess return.

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