When you sign up to be a value investor, you soon learn you have not chosen the easiest path to tread. Even so, here on The Value Perspective, we still find ourselves occasionally astonished at the way the wider market can seem so willing to write off the discipline’s prospects. Take the recent resurgence in value – it has been going for all of three months and already there are suggestions in some quarters it is over.
So, we might be forgiven for asking, growth pulls off the historically anomalous trick of outperforming value for the last nine years, give or take, and nobody seems too bothered? And yet, just a few months into this small uptick in value’s fortunes versus growth, its ‘That’s all, folks. If you aren’t invested by now, sorry but you’ve missed the boat. Move on – nothing to see here’? Seriously?
Let’s get a disclaimer in quickly. What we are about to say in no way implies a belief that, if you buy into value, from this point in time you are going to make a mint. Value is at present, we believe, moderately priced versus history. But take a look at the two charts we have to show you and decide for yourself whether the last few months have seen any real kind of equilibrium restored between value and growth.
The first chart shows the relative performance of the value and growth strains of the MSCI World index and two things are immediately apparent. First, as we said, value has had a pretty torrid time of it since 2007 and, second, the great performance it has enjoyed over the last few months registers as the slightest of reversals of fortune in what has been a very tough decade.
MSCI World index – value v growth
Source: Bloomberg, data shown from 2 December 2006 to 29 November 2016. Past performance is not a guide to future performance and may not be repeated
Now, whether you are looking at multiples of price to tangible book value, price-to-sales, bottoms-on-seats or whatever metric you prefer, a sensible way to consider the valuation of a sector or, in this case, investment style, is to think about what you are paying for the actual physical assets of the underlying businesses – which brings us to our second chart.
Price to tangible book
Source: Schroders, Thomson Datastream, data shown from 31 December 1997 to 29 November 2016
The valuation metric we have chosen is price to tangible book value and, while the ups and downs of the value line are not as pronounced as they might be – we felt it was important to show it on the same graph as the growth line – you should still be able to make out that MSCI World index businesses classified as value saw their valuations fall around the time of the financial crisis. They have not really recovered since.
Rather more apparent is the dramatic rise in the multiples investors have been willing to pay for growth over the last four years or so – even greater, it is worth noting, than at the height of the technology bubble in 1999/2000. This has played a very significant part in value’s dramatic underperformance versus growth and while, yes, the situation has reversed a little in recent years, those growth multiples are still very elevated.
That is why we hope you will forgive us if we roll our eyes each time we are told the value ship has already sailed. No, we are not suggesting value, from here, represents a one-way ticket to untold riches – as we said at the start, value now stands moderately priced versus history. By the same token, however, growth is hugely overpriced and the chances of it losing investors money from this point are similar great.