The Big Debate: Is 'value' investing dead?

That’s quite the dramatic title and one which, in some ways, feels like I’m going against the founding fathers of factor investing such as Nobel laureate Eugene Fama and Kenneth French – two academics who published a series of seminal papers providing a lot of the empirical basis for value investing in the 1990s (although it had been around before this). My view, however, is that there are questions to ask before thinking about utilising the value factor when investing. Simply relying on historic data showing that value has outperformed growth over the very long term is a risky strategy, definitely—in my humble opinion—over the current short to medium term. However, even if you put performance considerations aside, one could suggest that investors have simply moved on from wanting to seek value investments and strategies, particularly in their current form. Low interest rates, greater technology disruption and more specifically a focus on responsible investing are all more reasons why interest in value may at least be broken, if not dead.

First, let’s look at performance. Value investors have had a very rough ride in the last decade. In fact, based on one measure, the last decade’s negative returns have cancelled out all of the value’s positive performance going back to the mid-1990’s. However, many proponents of value will argue that there must be a reversion to normality, when value will prosper again, and the continuation of poor performance further amplifies this view.

But what would be the trigger for reverting to ‘normal’ given there’s limited expectation for increasing inflation expectations and even less expectation for rate rises anytime soon? What even is “normal” anyway? Without any evidence, one would have to go back to using a long-term view rationale of, “value" has always done better over the very long-term” or, “it’s cheap because it’s done badly” argument which seems a little like putting money on the 100/1 outsider just because you like the name; a strategy built purely on luck.

The crux of value investing is that while stocks tend to be cheap for a reason, the market often overshoots valuations so bargains can be discovered. For this reason, value investors can be found in untrendy industries—the big innovators and dynamic companies of the day are rarely available at prices attractive to value investors—but value portfolios getting backed further into oil, mining and airline stocks look especially vulnerable, and it’s harder than usual to see these sectors enjoying a resurgence to what value investors would consider ‘fair value’ anytime soon.

Betting against clear disruptive trends is another issue. In an age characterised by disruption, can value perform well? value investors find themselves long bricks and mortar retailers like Walmart and short (on an index relative basis) Amazon; long traditional communications stocks like Verizon and short Netflix. Yet, one could argue that creativity destroys existing business models as discussed in a research paper “Value is Dead, Long Live Value”, July 2019, OSAM. Their research suggests that we are in a technological revolution noting a similar fate fell on Value investors in prior revolutions and that these periods can last for 45 to 60 years. Our current revolution follows previous ages defined by key elements such as the automobile, steel, steam and factory production/mechanization. One well-trodden example talks of the rise of automobiles (growth) providing headwinds for railroads (value). Their view, however, is that there is reason for the poor performance of value investing and that it will eventually return to favour.

Looking at it another way whether the new faith in interventional support from the central banks could continue to hold back value investing, even into the medium to long term, furthering the platform for disruptive Growth businesses and other factor driven opportunities. Covid-19 is yet another headwind in getting back to anything that remotely looks like normal in the world of value investing.

It may also be worth considering whether the sheer size of recent underperformance has dented investor confidence, seriously tarnishing value’s once admirable reputation, and maybe to such an extent that it will take a very long time before interest will recover. Simply put, investors have more confidence in other ideas. It definitely offers a real test for the caveat that “past performance is no guide to the future”. Further still, value investing is also typically going against current key investor themes such as reducing carbon exposure and investing responsibly. Potential investors may simply shy away and seek other opportunities.

If you are thinking of allocating to value, it would definitely be a bold contrarian view at the moment for a whole host of reasons; importantly, beyond the investment case. For me, Value investing seems to be a bit like your English stay-cation; you’ve just spent hours blowing up your rubber 'dinghy “for the kids” but have now realised that the tide has gone out. You could stay and hope it comes back high enough soon—it is the tide after all so will do at some point—but by then, it might be getting dark and everyone’s going home.