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Will there be a 'value' revival?

IT HASN'T been easy for value fund managers globally in the past few years. Many have experienced redemptions and faced existential crises.

Matthew Fine, the portfolio manager of value strategy in Third Avenue Management, a firm founded by legendary value investor Martin Whitman, recalled in his second quarter newsletter how in the late 1990s, day-traders claimed to have dethroned investing legends. "Talented and thoughtful fundamental investors lost their hair with frustration. A number of investing legends even closed up shop, yet another parallel to recent days."

The other parallel is investors' willingness to pay enormous prices for technology companies, many of which produced little revenue and even less profit. While the arguments then and now were distinct, said Mr Fine, the summary thesis was similar. That is, we are living through a secular, not cyclical, change. "The implication of course is that participation in these secular investing trends represents some type of investing panacea."

Having set up shop just over three years ago, we are caught right smack in the period when the performance gap between value and growth are at its greatest. It has been tough.

When there is this constant chorus of "value is dead" and "have you considered changing your strategy" echoing all around you, one can't help but start to question. So I looked up Index Fund Advisers' numbers to see how value and growth have performed over the various periods.

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Table 1 showed that over very long periods, that is, 92 years and eight months and 50 years and eight months, small cap value is the indisputable winner.

The fact that disconcerted me the most was that growth trumped value over the last 30, 20, 10 and three years. Particularly disturbing is the 20-year period, when the starting point was the peak of the dotcom bubble!

So I sought counsel from the team. Luckily for me, my team is very grounded and clear-thinking.

The deputy noted that historically, or over a period of five decades, value outperforms growth by about two percentage points per annum. However, during the last 20 years, based on S&P growth and value indexes for big, mid and small cap stocks, growth has outperformed value.

"We can break down the last 20 years into two periods:

(1) From the market peak in August 2000 to December 2006 (roughly corresponding to the period when value outperformed growth); and

(2) from Dec 2006 - Aug 2020.

"During period 1 (Aug 2000 - Dec 2006), value outperformed growth by about nine percentage points per annum (pa), which is much higher than historical outperformance of about two percentage points pa. But in period 2 (Dec 2006 - Aug 2020), growth has outperformed by about four percentage points pa. So one can think of period 2 as value giving up prior outperformance (and more) of period 1."

He concluded: "An investor should look forward, rather than backwards. Looking forward, I would much rather put my money in value, due to historical tailwind and mean reversion from the very long (14 years) recent underperformance. And it is instructive, from period 1 returns, how much value can outperform growth. So all value investors should keep our hopes high and our chins up!"

Meanwhile, the analyst has his own take as well.

First, he said there is a flaw in taking today as the end point. Today, prices for growth stocks are high. Any performance period with a high end-point will show a superb performance.

If one were to do three-, five-, 10-year periods ending at early 2000 at the peak of the dotcom bubble, one is going to get splendid performance for the growth strategy as well.

The other flaw is the definition of value and growth used by the index providers. Which stocks qualify as growth and which value?

And finally, most indexes used market cap to weight their indexes. This results in bigger companies having a greater weight in an index.

"Factor investors can never be 100 per cent certain that a factor is real or not. They try to gain conviction by being as data-driven as much as possible, and looking as far back as possible when conducting empirical research," he said.

As such, he took Fama-French data, which goes back to 1926, and measured the performance based on rolling periods of 30-, 20-, 10- and five-years. Value is defined as the 20 per cent cheapest companies based on Book-to-Market, or the inverse measure that I usually use, Price-to-Book. Growth is defined as the 20 per cent most expensive companies.

Table 2 shows his results.

Using the market cap approach, over five-year rolling periods value has outperformed growth 71 per cent of the time. The number gradually increases as we extend the horizon. What is interesting is that prior to 2020, there has never been a rolling 20-year or 30-year period where value trailed growth, so this is literally a first, he noted.

"A pessimist will look at the data and say that this could be the start of the unravelling of value. An optimist will conclude that value has worked since 1926, and we shouldn't be too quick to dismiss an approach that has seen long-term efficacy, but short-term underperformance. The optimist will probably also point to the strong 10-year returns that follow a period of value underperformance.

"So value needs a leap of faith to execute (which is why it's easy to quote value investing principles, but hard to implement them), but my view is that it's just a small leap, given how strong historical results were."

However, one needs an even smaller leap of faith if we were to examine equal-weighted results - basically instead of sizing the value stocks by market cap, we just equal weight all of them (which is essentially Inclusif's approach), he noted.

"Basically, the equal-weighted implementation of value has done very well, and there still hasn't been a single 20-year or 30-year rolling period where it underperformed growth," he said.

"Nobody knows for sure what the future will hold, maybe all the value factor believers will be proven wrong as value suffers another 20 years of poor performance, but I personally prefer to invest in a way where the probabilities (as proxied by long-term empirical data) are in my favour. So far, based on the Fama-French US value portfolios, I think the odds are still in the value factor's favour."

Finally, I'd like to add my two cents worth to the value versus growth discussion.

One, value makes logical sense. We want to buy cheap and low and sell high. That's what investing is, no? To us, it's dicey trying to buy high, and hope to sell at an even higher price to someone else.

Two, if you are the last one holding an expensive stock and you can't find someone else to sell it to, it can take a long while for you to get your capital back. After the burst of the dotcom bubble, the Nasdaq took some 15 years to recoup all its losses suffered after falling from its peak in 2000.

Our conversation took place just a few days before the correction in Nasdaq recently. Interestingly this time round, we are not seeing indiscriminate selling in the value stocks that we hold in Asia. This seemed to be a departure for what we've experienced in the past three plus years: it used to be, whenever the US markets were down, we'd be down as well.

Are we finally seeing the beginning of the revival of value? I certainly hope so. I'm speaking not just for ourselves, but for all the long-suffering value investors out there.

As Mr Fine from Third Avenue Management valiantly said: "It has also been our experience that such periods (of value underperformance) have been followed by periods of torrid value strategy outperformance as accumulated equity market distortions reverse and normalise... For those who continued to march on, an incredible period of vindication was not far off."

* Hooi Ling is the portfolio manager of a no-management fee Asia fund, Inclusif Value Fund (

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