In the past few years, active value managers have seen their assets under management shrink significantly. After years of underperformance and the facing the relentless push towards Index Funds/ETFs, value managers are bearing the brunt of these underlying trends. This begs the question, is value investing passe?

If value investing means a commitment to quantitative measures such as low Price to Earnings, low Price to Book, high dividend yield, etc, then perhaps so. Many of the companies that display these characteristics now are in businesses that being disrupted and their low valuation is a reflection of the market’s recognition that their business models may in be jeopardy.

On the other hand, if value investing means buying a security below its intrinsic value, then value investing is as timeless as ever. Charlie Munger has been quoted saying, “basically, all intelligent investment is a value investment.” Why would anyone buy an asset above what it is worth? From this perspective, value investing is not opposed to investing in growth stocks, neither should these growth stocks be forced to be valued along with the quantitative metrics that are often associated with value investing. It just accords with common sense that stocks that have stronger growth prospects be valued higher using a common valuation metric compared to one that is struggling.

Ballie Gifford funds have been outperforming their peers significantly in 2020. The article Quality Delivers by Tom Walsh refers to research by Professor Hendrik Bessembinder. In the study, he found that only 4% of all stocks in the US equity markets, in the period between 1926 and 2015, created value for shareholders over their life as a listed entity. In the international equity market, the list is even narrower with only 1% of the equity universe accounting for all the value created between 1990 and 2018. The implication of this is profound. Quality matters, quality is scarce, and ultimately only quality rewards shareholders.

30 November 2020