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Accept no substitutes – there is only one kind of value investing

One snag about value’s name and strong long-term track record of outperformance is that other strategies have started trying to associate themselves with its more positive qualities

08/08/2017

Andrew Evans

Andrew Evans

Fund Manager, Equity Value

As value investors, here on The Value Perspective, we have long been comfortable with pursuing unpopular arguments, championing out-of-favour causes and fighting difficult corners – all in an investment context, of course.

Until recently, however, it had never occurred to us our inbuilt contrarianism would put us in serious danger of losing the language battle.

Then, while on holiday, we read a book on rhetoric and began to realise, since value investors are contrarian by nature and will therefore be in a minority on pretty much any investment argument, there appear to be an awful lot of uncomplimentary terms associated with the strategy.

One that immediately springs to mind is Warren Buffet’s business partner Charlie Munger’s description of value as “cigar-butt investing”.

Cigar-butt investing

More generally, when growth is outperforming value in the markets, the situation is often portrayed – rather romantically – as a “flight to quality” and yet, whenever value gains the upper hand, it is dismissed as a “dash for trash”.

“Cigar butts” and “trash”? These are insulting enough terms when they are merited, let alone when being used in the context of an investment strategy with a strong history of long-term outperformance.

Even when value is doing well, some commentators seem anxious to ascribe its success to other reasons.

As value stocks enjoyed a shift in their favour last year, for example, their outperformance versus growth was often attributed to the spending ambitions of Donald Trump – for much of the media, hardly a positive association in itself – rather than accepting value could actually be enjoying a rally on its own merits.

Where are the positive ‘value’ metaphors?

If you think all this sounds a little paranoid, try coming at the issue from the other direction – where are the positive value metaphors?

Where are the “flight to quality” equivalents – the “hype avoidance” and “prudent price hunting”, say, the “independent-minded investing” and “clear-minded contrarianism”?

OK, this is harder than it looks but please do tweet your own suggestions to us @thevalueteam

Of course, with its positive connotations of picking up a fundamentally decent business at a bargain price, the biggest rhetorical weapon value investors have in their armoury is the word ‘value’ itself – and yet this is precisely where our battle is in greatest danger of being lost.

Aware of its power, other investment strategies have started to look to associate themselves with the name.

There is only one true ‘value’

The way some investors now talk about buying ‘quality value’, say, or ‘franchise value’ does not sit easily with us, here on The Value Perspective, because at its heart value investing is a beautifully simple idea.

Numerous academic studies demonstrate the benefit of buying companies that are cheap versus their current or historic earnings or asset base – and, if you do not aspire to that simple premise, your investment strategy might be growth, it might be momentum but it really is not value.

Over the years, value investors have learned to adopt something of a ‘Sticks and stones’ attitude but it does seem a bit much that other strategies now want to associate themselves with a brand they have more usually disparaged.

Of course we understand why they would want to cherry-pick value’s good bits– for example, piggybacking off its tremendous long-term track record – but we object to being left only with the “trash”.

 

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Author

Andrew Evans

Andrew Evans

Fund Manager, Equity Value

I joined Schroders in 2015 as a member of the Value Investment team. Prior to joining Schroders I was responsible for the UK research process at Threadneedle. I began my investment career in 2001 at Dresdner Kleinwort as a Pan-European transport analyst. 

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