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Can value bounce back? with Tobias Carlisle, part 1

We recently had the chance to chat with value investor and author Tobias Carlisle and, in the first of three resulting articles, we discuss whether value is dead or very much alive and, in due course, kicking

18/12/2019

Juan Torres Rodriguez

Juan Torres Rodriguez

Research Analyst, Equity Value

One great irony of value investing is that, in order for it to work, most people have to believe that it doesn’t. And one consequence of that is, from time to time, value’s many doubters will argue the strategy is near death’s door – or indeed that it has actually passed through it – while its champions will respond that periods of ill-health are only to be expected and there is life in the old dogma yet.

That said, given value has endured one of its longest-ever periods of underperformance versus growth, it is – to a certain degree – understandable why such concerns exist. We have acknowledged that ourselves, here on The Value Perspective, in pieces such as Value’s vocal doubters, and the subject also cropped up in our recent podcast conversation with value investor and author Tobias Carlisle.

Carlisle, who is a deep-value strategy portfolio manager at a US fund house, as well as the brains behind the successful Acquirers Podcast, Acquirer’s Multiple and Greenbackd websites and books such as The Acquirer’s Multiple (2017) and Deep Value (2014), admits to having some sympathy with those who contend value is dead – although he is very quick to come back with a counter-argument for it being alive and, in due course, kicking.

“Out of the last 30 years or so, value has really only outperformed in maybe seven – so I understand why people would make that argument,” he says. “The counter to it, though, is the logic of value investing is so compelling. The idea is not that you’re trying to buy things that have a low ratio to their book value, earnings, cashflow or whatever. The idea is just that you are trying to buy them for less than what they are worth.

“And the bigger the discounts you can get the control of these things at or the bigger the discounts you can get invested in these things, the better you should do over the very long term.” One feature of the last decade or so, however, is that industries that have done very well have also tended to be relatively expensive – and thus largely unattractive to value investors.

“If you are a value investor in the technology sector, you could have done very well – in fact, you have probably outperformed your peers,” Carlisle points out. “The issue has been that value investors are just underinvested in sectors like tech, because they are relatively more expensive, and are more concentrated in asset-heavy industries and sectors like financials, which have had their own problems over the last decade.

“So I understand the ‘value is dead’ argument but the reason is more sector composition of portfolios than it is any problem with the strategy itself. So I’m still a huge advocate and I think the best time to be a value investor is when everybody says it does not work anymore.” To underline the point, Carlisle advises any investor to visit this website, which houses the data library of US economist Ken French.

“This is a website where you can look at any number of the return streams to various different value strategies – price to free cashflow, price to earnings, price to book value – and you will find there are five or six very distinct cycles that lasted two to three to five years, where value investing underperformed. But the outperformance over the full cycle is enormous. Its massive.

“So, as a value investor, you are sort of paid to endure periods of underperformance – that’s really what being a value investor is. It is a double-edged sword. It means it takes a long time to shake the value guys out.” This time, however, Carlisle points to anecdotal evidence of investors, who had previously been value-oriented in nature, becoming more focused on stocks offering high growth and high return on invested capital.

“What they are thinking is, if this company can compound at a high rate for a long period of time, it is going to be worth much, much more in the future,” he explains. Their logic then goes that the price they are paying – though high on any traditional metric – will be undervalued. “That has been a good bet for some of the last five years in particular,” he adds. “But I don’t know that it has been a good bet over the full data set.

“So, if we have in fact entered a brand new era, then value investors have to adapt and become more like the growth-oriented value investors I was just describing. What I think is more likely, however, is we are just at the peak of a cyclical boom and we are going to go back through and have a bust at some stage – and then there will be another very good period for undervalued companies.”

Author

Juan Torres Rodriguez

Juan Torres Rodriguez

Research Analyst, Equity Value

I joined Schroders in January 2017 as a member of the Global Value Investment team. Prior to joining Schroders I worked for the Global Emerging Markets value and income funds at Pictet Asset Management with responsibility over different sectors, among those Consumer, Telecoms and Utilities. Before joining Pictet I was a member of the Customs Solution Group at HOLT Credit Suisse.  

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