Returns to the Value factor continue to disappoint. Against Momentum it has been almost one-way traffic for the whole of 2020, whilst in the longer term, we are now approaching the low point (for Value relative to Growth) reached in 2000 as per the Russell 1000 Index. [The Russell 1000 Index represents the 1000 largest capitalisation firms in the US]. Brief spikes in Value (as seems to be happening currently) last only a few days, before the selling resumes anew.[Note: the chart below plots Value against Momentum, not growth; but a nearly all the highest momentum scoring shares ARE growth shares, they amount to one and the same]. In case there should be any doubt, it IS a global phenomenon; only US Value has beaten the MSCI World Index, and all major Value regions have even lagged long-dated UK Government bonds, which are a risk-free asset.
Evidence Based Investing
From time to time both ourselves and our clients get contacted by journalists looking for quotes and views on the debate surrounding Active and Passive Investing, which (usually) revolve around asking us what our investment approach is, or how we use the two types of investment strategies for our portfolios. So, in order to formalise our response and to give clients an idea of how to respond should they receive similar enquiries, we decided to put our views down “officially”, in the form of a Q&A.
Under the ESG umbrella, there is another category that pertains more to the ‘S’ and ‘G’ letters – gender equality. Given the rise of movements like MeToo and TimesUp, there is increased recognition and acceptance of gender equality and diversity at work. And thanks to UK government-backed initiatives like the Women in Finance charter, the Alexander Hampton review, which aims for 33% women on boards of all FTSE 350 companies by 2020, as well as mandatory gender pay gap reporting for companies with more than 250 employees, gender equality has become less an esoteric aim and more mainstream.
“If all you’re trying to do is essentially the same thing as your rivals, then it’s unlikely that you’ll be very successful” – Michael Porter. In the last fortnight, there has been something of a reversal in the market’s favorite Factor trade – long Growth/Momentum and short Value. It began in the US, but as is normally the case, it soon went Global. As a result of this, months of gains in Momentum (long) and Value (short) were lost in a matter of days. But one would not have known anything of this, looking at the Indices, with all major markets seeing gains since the start of September.
The following blog was produced by Garrett Quigley of GSI (Global Systematic Investors LLP). GSI are the appointed sub-distributor for the Global Sustainable Value fund which EBI will be using in it’s Earth portfolio suite. You may wish to view former EBI blogs on the Value premium both here and here. Summary • In global developed equity markets, Growth has outperformed Value for a protracted period.• Growth is now trading at a historically high price level relative to Value.• Much of the recent outperformance of Growth vs Value is due to the change in the valuation spread between Growth and Value.• When Growth last traded at this valuation level, it subsequently underperformed Value for 20 years.
“The things that will destroy America are prosperity-at-any-price, peace-at-any-price, safety-first instead of duty-first, the love of soft living, and the get-rich-quick theory of life” – Theodore Roosevelt. As we discussed last week, professional investors (a very loose term), are remaining bearish on US equities, but they are by no means alone. In this market cycle, far from becoming euphoric, investors are becoming ever more concerned/worried/anxious as prices rise higher. It IS an unusual state of affairs and heightened by the financial media’s constant doom-laden headlines; sometimes it appears that investors won’t fully relax until there’s a crash!
“Buy not on optimism. Buy on arithmetic” – Benjamin Graham Analysts and fund managers rarely agree, but on one thing they are united; the UK stock market is cheap, at least in relative terms. Since the Brexit Referendum, the UK All Share Index has lagged the World (ex-UK) by over 6 percentage points per annum on an annual basis and now stands on a Dividend Yield of 4.22% (as of 17th May) and a Price Earning Ratio of 16.05x compared to 2.32% and 18.63x for the World ex-UK Index. There has been a flurry of articles proclaiming that the UK share market is cheap,, with a JP Morgan fund manager declaring that they have not been this cheap since World War One! The charts below show the damage wrought since the Brexit result.
A robot walks into a bar and takes a seat. The bartender says, “We don’t serve robots.”The robot replies, “Someday – soon – you will.” One only has to watch financial TV for a few minutes to hear some pundit or other lower their voice and intone sagely, that “markets hate uncertainty”. But when exactly was anything about markets NOT uncertain? What the speaker is actually saying is that market participants hate losses, (which is why they were so keen to see the Fed bail them out in 2008-09, a habit that both parties have since found hard to break).
“When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact” – Warren Buffett. In recent years, the role of the Chief Executive has become increasingly high profile. They are widely recognised (at least in the media) and feted as veritable supermen, taking a firm by the scruff of the neck and leading them to greater glory. They are interviewed by business media with a reverence that borders on awe and they wield a great deal of influence on governments – the near-universal belief in their judgment on the part of MPs, for example, may help to explain why the latter are (mostly) against Brexit. A “loss of confidence” is often a precursor to an economic slowdown (and job cuts), which may also justify parliamentarians’ attentiveness.