Billionaire hedge fund manager and venture capitalist Cliff Asness kicked off an intense discussion regarding the underperformance of value investing strategies with “Is (Systematic) Value Investing Dead? published on May 8.
Mr. Asness’ analysis is complicated, befitting his quantitative investing style, covering the usefulness of valuation techniques like price to book in a market environment dominated by high profit margin technology companies.
The conclusion of the piece was that value investing was far from dead, and it got me thinking very seriously about adding a value component to my portfolio. He writes, “Value is exceptionally cheap today, and it gets cheaper (and becomes clearly the cheapest ever) the closer our analysis gets to realistic implementations. Measured in the most realistic way (for us) neither tech bubble nor the global financial crisis can lay claim to the cheapest ‘value of value’ anymore. Sadly, looking back, and wonderfully … forward, today has that honor.”
The phrase “value of value” refers to the cheapness of value stocks relative to the market as a whole. So, in other words, value stocks are now the cheapest they’ve ever been relative to growth stocks.
Domestically, fund manager Kim Shannon published “Waiting for Dawn” on the website for Sionna Investment Managers, the asset management firm she founded.
As a valuation-conscious fund manager, Ms. Shannon is of course a biased observer. Nonetheless, the short paper provides useful context. It notes that the current period of value investing underperformance is the longest since the Great Depression. “Today, value is more undervalued relative to growth (on a total annualized return basis) compared to any other time period since 1936, cheaper even than 1940 or 2000," she writes.
Ritholtz Wealth Management’s Josh Brown, who I also featured earlier in the week, published “Value Investing is Immortal” on Tuesday. Mr. Brown writes “Value investing is immortal. It cannot die. Perhaps the way it’s been traditionally practiced is dead. The metrics that the value discipline has been based upon are not and have not been relevant for a long time.”
Mr. Brown goes on to warn about value traps, stocks that are cheap for good reason – the profit outlook is deteriorating faster than valuation multiples - and that point is well taken.
It is Mr. Asness’ research I find most compelling and I’m now officially interested in a value investing strategy for my portfolio. I’m not sure what form it will take - a small position in a long short hedge fund seems most likely off the top of my head – but I’ll report to readers if a transaction takes place.
-- Scott Barlow, Globe and Mail market strategist
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The Rundown (for subscribers)
Five major points for investors right now (and the highest conviction call)
David Rosenberg summarizes his five major points to investors at this historic moment in time. And yes, the famed economist known for his bearish take on markets is actually bullish on something.
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Beneath the surface of the stock market’s near-miraculous rebound since March, seismic shifts have altered the fortunes of the companies within Canada’s benchmark index. The S&P/TSX Composite Index is now down just 17 per cent from its peak in February, before the COVID-19 pandemic took hold. That qualifies as a mere garden-variety correction in terms of total market losses. But at the level of individual stocks, the swings have been more on par with the pandemic’s powerful global impact. Tim Shufelt reports
The subtle message delivered by negative interest rates: Policy makers have no options left
Growing talk of negative interest rates in Canada and the United States is stirring fear about what such a dramatic move by central banks might mean for savers and investors. The biggest danger, though, may be something more subtle. If North American central banks did drag rates into negative territory, it would signal they are ready to double down on what they have already been doing for several years, with generally unimpressive results. Ian McGugan tells us more. (Also see: Once taboo, investors begin to imagine negative U.S. rates)
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There’s now a math formula for measuring the value of an adviser. Rob Carrick tells us how it works, and how you can calculate it.
Others (for subscribers)
TSX stocks that have cut dividends since the start of the coronavirus crisis
Wednesday’s analyst upgrades and downgrades
Tuesday’s analyst upgrades and downgrades
Tuesday’s Insider Report: CFO invest over $300,000 in this large-cap consumer staples stock
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Globe Advisor
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