Value Perspective Quarterly Letter – 1Q 2017
Value, back from the dead…
The story is now well-known. By mid-2016 value had underperformed growth for the longest period on record and was trading at its widest discount to growth since the dot-com bubble in 2000. Value then enjoyed a partial rebound through to the end of the year.
…or is it?
Value’s resurgence appears to have stalled in the first quarter of 2017, giving rise to the question, is the value rally over? When posed this question, whilst past performance is not a guide to future performance, we look to history for guidance. The analysis of periods of global value outperformance shows that this would be the shortest and smallest value rotation in 40 years if it stopped here. The level of value’s underperformance to growth remains at the level last seen during the dot-com bubble in 2000. Value underperformed growth for a decade and it will take much longer than a few months to unwind this (see chart below).
Source: Schroders, Thomson Datastream, 31 March 1987 to 31 March 2017. Past performance is not a guide to future performance and may not be repeated.
It is highly unlikely that value’s recovery versus growth will go in a straight line. Value investing is a marathon, not a sprint. Value is a very good indicator of long-term performance, but it tells you nothing about investment returns in the short term. What we can say, is for those willing to be patient the outperformance on offer from a true deep-value portfolio is possibly the most attractive opportunity available to equity investors today.
Investors must eschew short-termism to reap the long-term rewards
The average holding period for equities has fallen tenfold since 1950, and there is plenty of evidence to suggest short-termism can lead to higher costs and lower returns. There is one benefit of this trend however, and that is the more short-term the broader market becomes, the greater the potential benefit to those who are able to adopt a more patient, longer-term investment strategy. This could be termed our “behavioural edge” – that is our patience amid market hyperbole and the long-term mindset that we steadfastly adhere to. This way of thinking is in stark contrast to most other market participants, who tend to myopically focus on the next quarter’s financial results of the companies in their portfolios. By having a genuine 3-5 year time horizon we are able to invest in businesses that others are simply unable to pursue, and in doing so we could reap the long-term rewards.
Avoid the illusion of control in the short term
The trade-off to the superior returns that can be achieved by following a value-based approach is that we never know how long it will take for the market to recognise the value of our investments. Investment results in any one month, quarter or year are more or less random. We avoid commenting on short-term performance because it gives the false impression that our results over such periods can be definitively explained. Remember that the performance of a skilful investor is likely to look very similar to that of a lucky investor in any given quarter – the difference between the two only emerges over the longer term.
We look for businesses with the capacity to suffer
As long-term investors, we have learned that trying to second guess short-term trends, and using these to position portfolios, seldom delivers returns. Valuation spreads (the difference between the cheapest and most expensive companies) remain wide throughout the world. In this environment, your portfolio is characterised by significantly undervalued cyclical businesses with robust balance sheets that will provide us a margin of safety in a wide range of inherently unknowable future economic scenarios. Given a history of relatively long value cycles, your investment in a true deep-value portfolio should deliver significant outperformance on a 10-year view.
The views and opinions displayed are those of Ian Kelly, Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans and Simon Adler, 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.