The last six months have seen the value style of investing stage a very welcome comeback which has had value managers breathe a sigh of relief. Only a few months ago, they admitted in a web-based presentation that value investing lagged the returns of growth stocks for years, but predicted a turnaround. Barely six months later, the duo noted in an update on value investing that value stocks have rallied strongly. The sharp fall in share prices in March last year also helped value investors add to their favourite holdings at low prices and, more importantly, helped to boost returns of value funds. the gap in fundamental valuation between the most highly rated and the least highly rated shares globally – remains at extreme levels. The fundamental valuation measurements included price-to-book, price/earnings and dividend yields. The valuation gap implies that value shares have a long way to go to return to normal levels and, hopefully, strong returns for value investors rather than disaster for growth investors.
Companies are attracting really high valuations because they are exceptional businesses that are changing the world and these high valuations are simply the new reality. The top four largest tech companies at the height of the boom were Microsoft, Intel, IBM and Cisco, genuinely high-quality businesses that delivered exceptional growth in profits and high attractive returns. From the peak of the market cycle in March 2000, global equity indices entered a long and painful bear market. Even five years on from the peak, the MSCI World Index was still under water in absolute terms. Energy companies are another value area. They are showing capital discipline at last, focusing on costs and returning capital to shareholders. This, in combination with exposure to potentially rising oil prices, makes for a compelling opportunity. Some high-quality businesses were unfairly sold off and this allowed us to pick up some exceptional purchases which we expect to rebound as the world recovers from the pandemic.