THE DEATH OF VALUE?

VALUE INVESTING UNDERPERFORMING IN 2017

Value investing is mired in one of its worst stretches on record, prompting concerns that the investment style favoured by generations of fund managers is losing its effectiveness...

Value fund managers have felt the pinch. The median value fund around the world lagged behind the median growth fund by 7 percentage points in the first half of the year, on pace for the worst underperformance since 2007, according to eVestment.” – WSJ 6 August 2017[1]

VALUE INVESTING CURRENTLY OUT OF FAVOUR

Investors have pulled $116 billion from U.S. large-cap value funds over the past 10 years, according to Morningstar, with more than one-fourth of that outflow occurring over the past 12 months.” – WSJ – 6 August 2017

[1] https://www.wsj.com/articles/hot-stock-rally-tests-the-patience-of-a-choosy-lot-value-investors-1502020804

 

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VALUE INVESTING IN THE PAST

The market’s attraction to highflying stocks punished value investors in a similar fashion in the late 1990s during the dot-com bubble. Growth stocks beat their value peers toward the end of two major bull markets that peaked in 2000 and 2007, before large market selloffs reversed the trend, putting value stocks ahead.” – WSJ – 6 August 2017

VALUE INVESTING UNDERPERFORMANCE EXPLAINED

The attraction to growth stocks, investors and analysts say, stems from the low interest rates, slow economic growth and mild inflation that have gripped the world. Central banks have been accommodative for so long that they have skewed conventional investor wisdom, analysts say, benefiting companies that can generate growth.” – WSJ – 6 August 2017

In this low-inflation, low-growth world we’ve become accustomed to, investors are chasing anything that has growth tied to it. When that happens, value suffers.” - Kelman Li, Bernstein Research

Generally, factors perform well when they are thought to be in short supply. When times are bad, investors gobble up stocks that can show growth, because this is in short supply. When the economy has momentum, they choose “value” stocks as their way to participate most cheaply in the upswing. So value underperformance generally implies that investors are feeling negative. And value, all across the world, is enduring a terrible year.” – FT – 8 September 2017[1]

OPPORTUNTIES FOR VALUE INVESTORS

1.      A Large Market Selloffs

The super-stocks that lead a bull market inevitably become priced for perfection. And in many cases, the companies’ perfection turns out eventually to be either illusory or ephemeral.” - Howard Marks

Elevation Capital Commentary: With potentially tighter monetary policy in the US and around the world in the near term, geopolitical and economic shocks will have greater effect on stock markets around the world.

 2.      Contrarian Play vs Herding

 Comparing the valuation of different stocks suggests that value is radically out of favour. Value stocks will always by definition be cheaper than others, but at a global level they are trading at a deeper discount to other stocks, in terms of price/earnings multiples, than at any time in a decade. There appear to be compelling bargains out there, but people are still not picking them up.” – FT – 8 September 2017

 3.      The Beginning of a Bear Market (i.e., The End of the Current Bull Market)

To be sure, much of value’s underperformance could still be cyclical. Historically, calling the end of value investing has been a fraught exercise.” – WSJ – 6 August 2017

Several statistical measurements demonstrate how unusual this market environment has been. The most obvious is the bull market’s longevity, fuelled largely by the Federal Reserve’s ultra-low interest rates and voracious bond buying. The upward trend in stocks already ranks as the second longest in American history since 1900 and the third highest in percentage gains, according to a tally by Bespoke Investment Group. From the trend’s start, in 2009, through its latest high, on Aug. 7, the Standard & Poor’s 500 has risen 267 percent.” – The New York Times – 19 August 2017[2]

[1] https://www.ft.com/content/2c633312-9471-11e7-a9e6-11d2f0ebb7f0

[2] https://www.nytimes.com/2017/08/19/business/the-stock-market-has-been-magical-it-cant-last.html

 1.      Mean Reversion -  Historically Value Has Beaten Growth

Some of the biggest and longest underperformance episodes for value have been followed by big stock declines in the aftermath of glamorous growth stock eras (1973-1974 and 2000-2003). Eras of anaemic economic output like 1933-1940 and the recent episode from 2007-2017 would need to end for value to succeed.” – Smead Capital – 3 October 2017[1]

Over the past five years (at the end of 2016), Growth has outperformed Value. According to Bloomberg[2]:

§  MSCI USA Growth Index outperformed MSCI USA Value Index by an average of 0.3% annually over rolling five-year periods.

§  MSCI EAFE Growth Index outperformed MSCI EAFE Value Index by an average of 0.2% annually over rolling five-year periods.

§  MSCI Emerging Markets Growth Index outperformed MSCI Emerging Markets Value Index by an average of 2.8% annually over rolling five-year periods.

However, over a longer period, Value has beaten Growth. According to Bloomberg[3], at the end of 2016:

  • MSCI USA Value Index outperformed MSCI USA Growth Index by an average of 0.2% annually over rolling five-year periods since 1979.
  • MSCI EAFE Value Index outperformed MSCI EAFE Growth Index by an average of 3.1% annually over rolling five-year periods since 1979.
  • MSCI Emerging Markets Value Index outperformed MSCI Emerging Markets Growth Index by an average of 2.1% annually over rolling five-year periods since 1979.

[1] https://smeadcap.com/smead-strategies/smead-blog/entries/2017/10/02/value-investing-dead/

[2] https://www.bloomberg.com/gadfly/articles/2017-01-06/value-investing-resurges-after-being-knocked-down

[3] https://www.bloomberg.com/gadfly/articles/2017-01-06/value-investing-resurges-after-being-knocked-down

EVEN “THE BEST” VALUE INVESTORS GO THROUGH DIFFICULT PERIODS

“A certain Midwest money manager has compiled an excellent record despite having underperformed the S&P over a third of rolling three-year periods in the past 30 years and almost a fifth of rolling five-year intervals in the same span. Warren Buffett is the name of that up-and-down investor. Think about how many investment committees would have forced you to fire a manager who had that degree of underperformance over that time frame.” – Grant’s Interest Rate Observer – 20 October 2017 

THE ELEVATION CAPITAL VALUE FUND – A CONSISTENT & DISCIPLINED VALUE INVESTOR SINCE INCEPTION

The Elevation Capital Value Fund has shown consistent discipline over nearly ten years - remaining focused on value stocks. It has also maintained an absolute return focus with conservative cash levels –  cash balance is currently 23.71% (as at 30 November 2017) and has been on average 20.5%, 21.4%, 26.8% in the last 3yrs, 5yrs and Since Inception. 

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THE ELEVATION CAPITAL VALUE FUND PORTFOLIO HOLDINGS AS AT 30 NOVEMBER 2017

The portfolio consists of high quality global names that are simply out-of-favour versus being out-of-business:

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For contrarian and long-term minded investors with an absolute return focus the Elevation Capital Value Fund offers what we believe to be a compelling and most importantly an aligned investment opportunity (all executives and directors of Elevation Capital are investors in the Fund on the same terms as all other investors).

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