For value investors, the past few years have been one long migraine – which may explain why these tortured souls are celebrating a mild recovery with so much excitement. It’s not that value investing has suddenly turned into an outright pleasure. It’s just that the pain has stopped.
You can measure value’s comeback in various ways. Over the past six months, Vanguard Canada’s Global Value Factor ETF (VVL) has produced ever-so-slightly better results than the company’s Global Momentum Factor ETF (VMO). A similar trend holds true in the United States. Since mid-year, the S&P 500 Value index, composed of the benchmark’s cheaper stocks, has performed marginally better than the broad market.
After years of lagging far behind, value investors finally have something to cheer about. Their favourite strategy of buying beaten-up stocks at bargain prices is no longer a dismal also-ran.
To be sure, the recent boomlet in performance is not exactly a stunning victory for value investing. But it may signal the start of a much bigger turn in the market, according to people such as Rob Arnott, the influential founder of Research Affiliates LLC, a money manager and index builder in Newport Beach, Calif.
Mr. Arnott is noted for his work in developing numbers-based “quantitative” approaches to the market. He says history shows that bargain-hunting value strategies generate superior long-term results, but with long patches of ineffectiveness. Since value investing has been out of favour for approximately 12 years, it is reasonable to expect a strong rebound in years to come.
“If history is any guide, now is the time to increase allocations to value strategies,” Mr. Arnott wrote in a paper this month.
Cliff Asness, another big name in the quantitative investing field, has frequently sparred with Mr. Arnott, but agrees with him on value’s new appeal.
Mr. Asness, who heads AQR Capital Management, a money manager in Greenwich, Conn., with US$185-billion under management, announced in early November that value stocks have become unusually cheap over the past two years for irrational reasons. It now makes sense, he said, for investors to tilt slightly toward value.
But how should one play a possible value rebound? There is no consistent value approach. A look at some prominent value investors’ portfolios shows that there are many different ways to define what constitutes a bargain.
At Chou Associates Management Inc. in Toronto, founder Francis Chou, one of Canada’s most famed value investors, is not afraid of taking bold, contrarian bets. At the end of August, the top three holdings in his RRSP fund were Bausch Health Companies Inc. (the former Valeant Pharmaceuticals), Resolute Forest Products Inc. and BlackBerry Ltd. He had nearly a quarter of the fund invested in basic materials, notably pulp-and-paper companies such as Resolute and Canfor Pulp Products Inc.
At Lester Asset Management in Montreal, value looks quite different. Its Canadian Equity Fund seeks “to buy shares at a discount to a company’s true worth.” At the end of October, the fund tilted heavily toward industrial and consumer stocks. Its top holdings included Pembina Pipeline Corp., Algonquin Power & Utilities Corp., renewable-energy producer Boralex Inc. and Sienna Senior Living Inc., an owner and operator of senior housing.
Across the border, Southeastern Asset Management has been practising value investing since 1975 – and with considerable success until running into the value-investing massacre of the past few years. Mason Hawkins, the company’s chairman, continues to espouse the merits of holding a “concentrated” portfolio of only a couple dozen companies, chosen for their cheapness in comparison with Southeastern’s estimate of their intrinsic value.
At the end of September, top holdings in Southeastern’s flagship Partners Fund included telecom operator CenturyLink Inc., General Electric Co. and toy maker Mattel Inc. Also on the top 10 list were C.K. Hutchison Holdings Ltd., a Hong Kong industrial conglomerate, and Canada’s own Fairfax Financial Holdings Ltd.
For those who prefer a more broad, by-the-numbers approach, Vanguard Canada’s Global Value Factor ETF offers an international portfolio of more than 1,000 stocks selected by the company’s proprietary system on the basis of factors such as price-to-earnings ratios and estimated future earnings. The fund’s top holdings at the end of September were Carnival Corp., Phillips 66 Co. and AT&T Inc.
If nothing else, the contrasts among these various value-hunting approaches suggest you should look under the hood of any strategy or fund you care to invest in. But the broader message may be how many stocks now appeal to value hunters. If a value renaissance is truly upon us, there are a lot of potential bargains to be had.
The notable holdings of value investors
Chou RRSP Fund: Bausch Health Companies Inc., Resolute Forest Products Inc., BlackBerry Ltd.
Lester Canadian Equity Fund: Pembina Pipeline Corp., Algonquin Power and Utilities Corp., Boralex Inc., Sienna Senior Living Inc.
Southeastern Asset Partners Fund: CenturyLink, General Electric Co., Mattel Inc., Fairfax Financial Holdings Ltd.
Vanguard Global Value Factor ETF: Carnival Corp., Phillips 66, AT&T Inc.
Holdings shown as of most recent filings