You might not believe it, but value investing has supposedly been out of favour with investors for a number of years – this is despite any fund manager worth their salt stressing a penchant for cheap stocks and the steady stream of Buffettisms popping up as memes on your Twitter feed.
Still it has been those investors following a growth approach that have been rewarded, particularly last year – MSCI AC World Growth delivered 7.5% return versus a marginal loss from MSCI AC World Value.
Both the MSCI’s and Russell’s value indices have underperformed in recent years, though they have outperformed their growth counterparts over the longer term and with lower volatility.
“High quality stocks had a great year in 2015 and significantly outperformed in most regions, and this outperformance has accelerated in the first couple of weeks of 2016, as markets have sold off, pushing what were already expensive valuations to even more extreme and uncomfortable levels, particularly in Europe,” says Andrew Lapthorne, head of quantitative equity research at Societe Generale.
“Investors are then keen to rotate back towards something more reasonably priced, i.e. value stocks. The question then is when?”
From Societe Generale’s research – in part looking at relative earnings – Lapthone suggests average valuations are still not at that point: “In a downturn, equities move to below average valuations and a fat tail of cheap distressed stocks becomes apparent. Sadly for value investors, we’re not quite there yet.”
