Why value investors must learn to take the rough with the smooth
Investment can be as prone to trends as any other area of life so, to illustrate our confidence that value stands the test of time, we will occasionally republish old Value Perspective articles. This one is from August 2011
Firm as our convictions may be about the advantages of value investing – and which the academic evidence proves – we are still aware of some pitfalls that can catch out the unwary.
For example, it is possible to buy a company too early – if we buy a business we think is valued too cheaply and it becomes cheaper still then, in the short term, we could be made to look silly.
In the longer term, however, if the decision to buy that company was sound, it will ultimately have been the correct decision.
The risk value investors are perhaps most taken to task on revolves around ‘value traps’ – where people buy cheap companies but these are cheap for a reason – so that is what we spend most of our time trying to protect ourselves against.
There are plenty of cheap businesses out there that deserve to be cheap.
As such, focusing on the drivers of every investment – understanding why the company is cheap and whether or not a business is of sufficient quality to be able to grow profits over time – is hugely important.
Ensuring our investments are not ‘value-trap’ businesses is a key part of what we do.
Performing differently means looking different
A final consideration for investors is there is, at times, a price to be paid for the pattern of performance value offers.
Since value investors obviously only seek out value and they do not mind what other people are doing, they typically have portfolios that look different to the benchmark – and consequently perform very differently to a benchmark index.
To perform better than the average, your portfolio must look different to the average portfolio.
Over time the different portfolio that value investing brings tends to translate into good performance.
But, over shorter periods, performance can look weak when compared to the benchmark – particularly in frothy or momentum-driven markets.
Value investors have no real control over this short-term volatility but – perhaps understandably – some investors do not like it. It is that dislike which creates the opportunity in value stocks, and we would simply say that short-term volatility is the price we have to pay for our strong longer-term performance.
Fund Manager, Equity Value
I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials. In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick 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.