TOL - 10th Jan, 2023
Why value investing will roar back in the 2020s
The ‘Roaring 1920s’ was a decade of economic growth and widespread prosperity. COVID set this century’s ‘20s off to a slow start, but have now set the scene for a resurgence of the Value style to its prime.
Value has traditionally outperformed Growth
Back in the 1990s, Eugene Fama and Kenneth French’s research highlighted the higher expected returns available over time for stocks with low market value relative to their book value of equity, small market capitalisation and higher beta(1). While Value-style investing had been around for many more decades (think Graham, Buffet), Fama and French were the first to systematically test Value and Growth returns across a large set of stocks(2).
Their results demonstrated that Value investing can be expected to produce superior long run returns relative to the Growth style.
Updated data through October 2022 demonstrates that Value-style stocks have outperformed Growth stocks in eight out of the last 10 decades, and in 82% of rolling 10-year average periods.
This observation of superior Value returns has now also been demonstrated in other markets including Australia(3).
Value’s poor last decade was an outlier
However, as we all know, the decade since the global financial crisis (GFC) has proven to be one of the most difficult ever periods for Value investing, recording the worst rolling 10-year results which extended into the start of the 2020s during COVID.
It is hard to determine all the reasons as to why the 2010s were such a tough decade for Value investing, but it is easy to point one - the extraordinary monetary policies employed over the decade that drove US Bond yields to 100+ year lows. Value stocks have historically shown a strong outperformance correlation with upward movements in bond yields, and yields are finally on their way back up.
The current inflationary conditions now point to a return to the “old normal” for bond yields, and a tailwind for the Value style.
Value stocks are now as cheap as ever
The impacts of the market’s penchant for Growth over the last decade have been stark on stock valuations.
Growth stocks are far more expensive and Value stocks are far cheaper today than they have been over most modern periods.
The chart below shows this based on forward Price to Earnings (P/E) ratios(4) but a similar observation can be made looking at market to book, dividend yield and our own proprietary Martin Currie Australia valuations.
As these extremes will inevitably unwind, the Valuation starting point for excess returns to Value investing is strong for the next decade.
Investors are at risk of being left behind as value reawakens
The other effect of Growth’s outperformance has been on investor positioning. Whilst the asset allocation to typical Growth managers was similar to Value through 2017, the poor performance of Value in the 2010s has resulted in investors culling their weights to Value managers(5). In recent times there have been questions of value investing death and distancing from style tags as an explanation of performance.
But Value is far from dead. We are now seeing renewed Value-style performance globally and in Australia, be that from cyclicality or a return to the long-term outperformance patterns shown by Fama French’s research(6).
Recent strong returns for value will pressure those investors who had moved to underweight Value strategies to reassess their asset allocations, redirecting flows back toward Value managers.
Value is set to prosper in the new roaring ‘20s
In summary, the current conditions are strong for Value-style strategies to produce superior long-term returns this decade:
- Value stocks have typically outperformed growth stocks by 5% p.a. over the last 90 years;
- The exceptional monetary conditions and zero rate policies have concluded, and we are now seeing the return of inflation and central bank tightening;
- Growth stocks are expensive and Value stocks are cheap relative to history;
- Investors are under-allocated to Value strategies as they have responded to the unusual returns of the 2010s.
Positioned for the Value Opportunity
Martin Currie Australia’s Select Opportunities Fund provides investors with a diversified exposure to our highest conviction stock ideas with Valuation potential, while aiming to control risks through our focus on Quality & Direction analysis.
Our stock selection, driven by our proprietary fundamental analysis process, is positioned to benefit from the continuation of the market’s rotation from Growth to Value.
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Reece has held the role of Chief Investment Officer (CIO) of Martin Currie Australia (MCA) since 2006, and is also the lead portfolio manager for MCA’s Value Equity, Equity Income and Diversified Income & Growth strategies. In his time as CIO, the MCA team has been recognised for its strong investment performance, and introduction of unique client solutions that have resulted in strong product ratings, an expanded client base, and industry awards.
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(1) Source: Eugene F. Fama & Kenneth R. French. June 1992: “The Cross-Section of Expected Stock Returns”, available from https://doi.org/10.1111/j.1540-6261.1992.tb04398.x. February 1993: “Common risk factors in the returns on stocks and bonds”, available from https://doi.org/10.1016/0304-405X(93)90023-5.
(2) Source: Martin Currie Australia, MSCI, IRESS, Kenneth R. French Data Library; as of 31 October 2022. Returns are based on Fama/French Research Portfolios: Value data is based on the average return on the Fama/French small & big high book-to-market portfolios, and the growth data is based on the average return on the small & big low book-to-market portfolios. Monthly return series from July 1926 through October 2022. Available from: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html#Research.
(3) For Australian data, as Kenneth R. French Data Library series ends in Dec 2021, the MSCI Australia Value/Growth and S&P/ASX All Ordinaries Accumulation indices are used to fill the gap to October 2022.
(4) Source: Martin Currie Australia, FactSet; as of 15 December 2022.
(5) Source: Martin Currie Australia, Morningstar Direct; as of 31 October 2022. Based on AUM of Morningstar Australia OE Funds & ETFs Australia Fund Equity category. Value: Australia Large Value & Mid/Small Value and World Large Value; and Growth: Australia Large Growth & Mid/Small Growth and World Large Growth.
(6) Source: Martin Currie Australia, FactSet; as of 15 December 2022.
IMPORTANT INFORMATION
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable.
Past performance is not a guide to future returns.
Issued by Franklin Templeton Australia Limited (ABN 76 004 835 849, AFSL 240827).
This publication is issued for information purposes only and does not constitute investment or financial product advice. It expresses no views as to the suitability of the services or other matters described in this document as to the individual circumstances, objectives, financial situation, or needs of any recipient. You should assess whether the information is appropriate for you and consider obtaining independent taxation, legal, financial or other professional advice before making an investment decision. Neither Franklin Templeton Australia, nor any other company within the Franklin Templeton group guarantees the performance of any Fund, nor do they provide any guarantee in respect of the repayment of your capital. Please read the relevant Product Disclosure Statements (PDSs) and any associated reference documents before making an investment decision. In accordance with the Design and Distribution Obligations and Product Interventions Powers requirements we maintain Target Market Determinations (TMD) for each of our Funds. All documents can be found via franklintempleton.com.au or by calling 1800 673 776.
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Reece has held the role of Chief Investment Officer (CIO) of Martin Currie Australia (MCA) since 2006, and is also the lead portfolio manager for MCA’s Value Equity, Equity Income and Diversified Income & Growth strategies. In his time as CIO, the...
Expertise
Reece has held the role of Chief Investment Officer (CIO) of Martin Currie Australia (MCA) since 2006, and is also the lead portfolio manager for MCA’s Value Equity, Equity Income and Diversified Income & Growth strategies. In his time as CIO, the...
Expertise
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