What does value investing have in common with Forrest Gump?
Gump is rewarded for his determination and resilience in the face of vicious storms in the 1994 film “Forrest Gump”. We believe returns could be bountiful for the genuinely long-term and patient value investor too.
The last decade or so has not been kind to value investors.
Not only are we that much older, we’re that much greyer as a result of performance that has left even the most hardened of us battered, bruised and battle-scarred.
Value investing involves buying stocks that are undervalued (cheap relative to their true underlying value) in the hopes that share prices will recover to reflect this true value. This is in contrast to growth investors who pay focus instead on the potential for growth in a company’s earnings rather than its valuation.
Value’s returns are the worst they’ve ever been
History tells us that value has been an enduring investment style over time and outperforms growth more often than growth outperforms value. But last few years have marked the longest and deepest underperformance of value versus growth seen in recent history.
Figure 1: How value investing has performed compared to growth investing over any 10-year period since 1936
Past Performance is not a guide to future performance and may not be repeated. For illustrative purposes only and not to be considered a recommendation to buy or sell.
When I look at a chart like this, I think one of two things. Either it’s different this time for some reason or this is the buying opportunity of a generation, relative to other equity investments investors can make right now.
So which is it?
I don’t believe value investing has become obsolete. As a style of investing, value isn’t fundamentally broken; it’s a human phenomenon that hasn’t changed. Value investing is still about constantly exploiting the irrational behaviour of emotional investors; being brave when investors are fearful and wary when they are ebullient.
When I look in the markets or read the news, I see humans behaving like humans everywhere. I don’t think we’ve become radically more rational or less emotional.
So if humans haven’t changed and value investing is still relevant, is this the buying opportunity of a generation?
Value stocks are as beaten up as they’ve been in nearly 100 years; investors have fled to what they perceive as to be the safe harbour in the current value storm: growth stocks.
Is the “safe” harbour the best place to be in a storm?
But what if the port is the worst place to be? What if it’s better to be bobbing out at sea with a bit of volatility rather than risk being hammered against the harbour walls during the storm?
Look at what happened to Forrest Gump and Lieutenant Dan in the award-winning 1994 film “Forrest Gump” starring Tom Hanks. The duo join the shrimping industry with Gump’s newly-purchased shrimp boat. But the competition is tough and their endeavours are highly unsuccessful; their nets pull up only old shoes and toilet seats.
Soon a hurricane sweeps through the area, destroying all their competitors’ boats. As the sole surviving vessel after the storm, the pair have the seas to themselves and haul net after net bulging with shrimp, finally reaping the bountiful rewards of their resilience and determination.
It’s not a subtle analogy. Value as a style has performed so terribly over the last decade that it may well seem as though value managers have been fishing in the wrong seas. But for those with enough grit and patience to weather the storm, the rewards could be substantial.
The scariest times can often yield the best rewards
While past performance is not a reliable indicator of future performance, history suggests that the best time to buy (and also the worst time to sell) has been after sharp pullbacks in relative performance.
The biggest rewards can come from being brave during the scariest times. For investors willing to ride out the turbulent seas, the potential rewards could be considerable once the tide turns.
The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Reliance should not be placed on any views or information in the material when taking individual investment and/or strategic decisions.
Fund Manager, Equity Value
I joined Schroders in 2001, initially working as part of the Pan European research team providing insight and analysis on a broad range of sectors from Transport and Aerospace to Mining and Chemicals. In 2006, Kevin Murphy and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Kevin and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
They do not necessarily represent views expressed or reflected in other Schroders' communications, strategies or funds. The Team has expressed its own views and opinions on this website and these may change.
This article is intended to be for information purposes only and it is not intended as promotional material in any respect. Reliance should not be placed on the views and information on the website when taking individual investment and/or strategic decisions. Nothing in this article should be construed as advice. The sectors/securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy/sell.
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.