Value stocks have underperformed severely in recent years, leading many investors to question the relevance of value investing or even to contemplate its demise.
Studies have shown that prices of stocks trading at large discounts to future earnings, cash flows or book value tend to outperform peers trading at large premiums. However, this has not been seen since 2007. Instead, value stocks have been getting cheaper and expensive stocks have become dearer. The widening of the gap – the value spread – has been observed across regions and sectors.
By the end of 2020, value spreads had reached the extreme highs seen at the peak of the tech bubble in 2000.
We believe the resulting underperformance of value stocks comes from prices diverging from fundamental values. We do not see much room for this trend to continue.
In our view, expecting prices of all stocks to converge towards fundamental values remains a sensible investment philosophy and the likely trend in the coming years. The probability that value spreads will compress is now at its highest since the peak 20 years ago. Thus, we are optimistic not only about the likely performance of value stocks, but also about the performance of multi-factor strategies.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.