Value investing has been out of fashion – here’s how to bet that will change over the long run.
Factor investing means looking for specific characteristics (factors) shared by groups of stocks that make them more likely to beat the market. But although this sounds like a sensible investing tactic, pretty much all factors have been heavily criticised over the last few years.
However, one factor that does still stand strong is “value”. Value investing is largely about focusing on cheaper stocks where the fundamentals – such as the price-to-book (p/b) or the price-to-earnings (p/e) ratio – are below average. Some investors go further and look for deep-value stocks – stocks that have blown up and are now unloved, but which have decent balance sheets and good cash flows. But these are hard to find, outside of Japan, and most investors would be happy if their portfolio just had more “cheap” and “better-value” stocks than the mainstream universe of liquid, large caps.
It’s all about the long term
This is where value indices come in. These simply tilt a portfolio of main-market large-cap stocks towards those with better fundamentals. The portfolios won’t look vastly different – if you invest in US equities, for instance, you’ll probably still see familiar names such as banks like Citi or GM – but the portfolio mix will look very different in aggregate.
For long-term investors, this is arguably all you need to capture an extra 50 or 100 basis points (ie, 0.5% or 1%) a year over the long run. And note it’s definitely about the long run. Value has worked over many decades, but not always. There’s a good chance value will outperform over the next few, more-defensive, years, but if you can sit tight for ten or 20 years, value stocks and indices should ultimately reward you for taking the extra risk of buying cheap stocks.
The good news is that there’s a whole load of value-orientated funds, with iShares offering some of the biggest (in terms of assets under management), including ones for Europe (LSE: IEFV), the US (LSE: IUVF) and the world (LSE: IWFV) – all of them using MSCI indices. But these funds aren’t the cheapest – Lyxor wins that prize for its US value fund, which has a total expense ratio (TER) of 0.19%.
I’d also note that Vanguard has a global value factor ETF, with a TER of just 0.22%. This is great value, and the Vanguard fund is, by definition, much broader as it includes the whole developed world. Like many of its peers, the Vanguard fund weights a share in an index using three metrics: p/b, forward p/e and cash flow. Top holdings in the fund tend to be less technology dominated, and are more focused on industrials, financials, and some resources stocks.
Expensive, but rewarding
I’d also consider a small ETF issuer called Ossiam. It has a very specific strategy, and follows the Shiller Barclays Cape indices for both European and US stocks. This approach builds on the research of economist Robert Shiller, who built indices that looked for unloved and undervalued sectors using something called the cyclically adjusted price-to-earnings ratio, or Cape, which looks at the p/e ratio over the long term (it uses average earnings over ten years, thus adjusting for ups and downs in the business and stockmarket cycle).
The index identifies the five most undervalued sectors of ten in the stockmarket. The sector that exhibited the weakest momentum over the prior 12 months is then eliminated from the remaining five. Finally, the strategy takes an equally weighted long position in each of the four favoured sectors.
The charges on its US ETF (LSE: CAPU) are by far the highest in the value ETF sector, but this strategy could be hugely rewarding over the long term. Since launch in July 2015, the fund is up 50% against 36% for the benchmark index.
Activist watch
After rejecting a takeover bid from activist investor McCormick & Co in 2016, Premier Foods faces a reckoning, says Chris Hughes in Bloomberg. The maker of Mr Kipling cakes had argued that the offer of 65p per share was too low. Premier opened its books to the bidder, and McCormick walked, perhaps having been deterred by the group’s pension obligations.
But as in so many successful bid defences, the directors’ assessment of Premier’s worth hasn’t been vindicated, notes Hughes. (Shares currently trade at 38p.) And now Oasis Management, the company’s second-largest shareholder, wants the CEO out. But it’s unclear what a new CEO could do differently, given the sizeable pension obligations and high leverage.
Short positions… Jay-Z becomes VC
• Andreessen Horowitz has become the first venture-capital (VC) firm to raise a large fund focused on cryptocurrencies, says Richard Waters in the Financial Times. The Silicon Valley firm has raised $300m to back new cryptocurrency-related ideas, including investing in the currencies themselves.
The potential for blockchain – the digital ledger that records transactions in digital currencies – to support a new class of “disruptive online applications” has drawn particular interest from venture-capital funds, at a time when large areas of online activity are dominated by a handful of giant internet companies. However, most VC investors have been left struggling to find a way into the sector. Indeed, the VC fund model is “not optimised for investing in the blockchain/crypto sector”, since crypto assets have become “highly liquid and volatile”, says Fred Wilson of Union Square Ventures, one of the first VCs actively to invest in blockchain start-ups.
• In other venture-capital news, rapper Jay-Z has launched a new venture-capital fund, says Matthew Field in The Daily Telegraph. Launched with Walden Venture Capital, the new fund will be called Marcy Venture Partners, after Jay-Z’s childhood home in Brooklyn, New York. It’s not yet abundantly clear what the fund will invest in, but Jay-Z is no stranger to start-ups, having been an early investor in Uber in 2011, when the company was valued at just $300m (it is now worth more than $70bn). In the past, the rapper has also invested in finance app Robinhood and private-jet company JetSmarter.