The recent value upswing has provided renewed hope of a comeback and, arguably, ideal conditions for deep and consistent exposures to the style.
Although timing equity markets and factors is extremely difficult, the view from Robeco is that the longer-term outlook for value is attractive.
Guido Baltussen, lead portfolio manager at Robeco, points out that growth has outperformed value over the past decade. The only exception to this trend was in 2016 when value momentarily outperformed by double digits.
Since then, growth has rallied strongly, driven primarily by a handful of mega-cap darlings. This resulted in the widest valuation spreads between growth and value on record.
Baltusssen argues that this period is comparable to prior phases of multiple expansion, such as the Nifty Fifty and the dot-com eras, when growth stocks, such as Hewlett-Packard (HP) in the 1990s, surged.
“Since then, HP has matured into a value stock following a long, wintery period for its investors. Therefore, we believe value investors are well-positioned for a mean reversion in share prices, particularly if the growth stories linked to some of the expensive stocks fail to materialise.”
The diversification benefits of value
The value style, according to Baltussen, is an effective diversifier in multi-manager portfolios. It has a negative historical correlation with trending markets and just a slightly positive historical correlation with high-quality or low-risk investing.
“Research shows that value helps to reduce drawdowns in multi-style portfolios in the long run (ie value can function as ‘bubble hedge’) and improves risk-adjusted returns, even when we assume there is no positive value premium.”
He adds: “Besides the overwhelming academic evidence in favour of value, we believe investors need to consider whether it is prudent to continue to bet against the style. In our opinion, the diversification benefit of allocating to value is reason enough to consider it in your portfolio.”
Outlook for value
Despite the protracted underperformance of value, Baltusssen believes there are good reasons to allocate to the style. “Prolonged periods of value underperformance, due to the expansion of valuation multiples, are historically followed by sharp rallies.
He adds: “More recently, the announcement of successful Pfizer-BioNTech vaccine results on 9 November 2020 triggered a broad rotation from growth into value, perhaps signalling the start of the long-awaited value comeback. we believe the longer-term outlook for value is attractive.”
Raul Leote de Carvalho, deputy head of quantitative research group at BNP Paribas Asset Management, is similarly positive on value. “The covid crisis of 2020 seems to have amplified a flight to expensive growth that has accelerated since early 2018. Value stocks are simply as cheap, relatively speaking, as they have ever been while the opposite is the case for expensive stocks.”
He adds: “With value spreads now at extreme high levels last seen at the peak of the Tech Bubble everywhere, we do expect a period of value spread compression in the coming years. Capitulating on the value style right now might turn out to be a very costly experience. Multifactor strategies also tend to perform well in periods of value spread compression irrespectively of their level of sophistication.
“Thus, we feel optimistic not only about the performance of value stocks but also about the performance of multifactor strategies going forward.”
Kasper Elmgreen, head of equities at Amundi, remains positive on value investing but urges a degree of caution.
“After the announcement of the development of an effective vaccine in early November, the value rotation in Europe has accelerated, led by financials and banks in particular and supported by higher rates and inflation expectations.”
Amundi favours banks with commercial and retail banking exposure that have dominant positions in their domestic markets. Other sectors it sees opportunities are related to the re-opening of cyclically exposed areas, such as travel and leisure, retail, autos, and media and entertainment.
Elmgreen says: “While we believe the value rotation is not over and is set to continue, as the recovery continues to materialise, the road may be bumpy, with phases of stops and starts linked to short-term developments in vaccine rollout and covid-19 news flow. Looking ahead, we favour the quality value segment, while it continues to be important to avoid impaired business models.”
Value and ESG
Generic value strategies are often considered unsustainable as they are typically tilted towards asset-heavy sectors such as energy and materials. However, Baltussen contends it is possible to build sustainable value portfolios with reduced carbon footprints.
To avoid concentration in less sustainable companies managers can incorporate ESG considerations in every step of the investment process, he suggests. For instance, establishing that the portfolio’s ESG score is higher than that of the market index. And ensuring that its footprint on carbon, waste and water is lower than that of the benchmark.
“While conventional value strategies (that is, using book-to-price measures) often have an environmental footprint that is more than 50% above their respective benchmarks, enhanced valuation measures do not exhibit tilts to high emitters,” he concludes.
