Where is the Value?
Investing can be seen as difficult and there are many schools of thought as to the best approach. The APC Investment Philosophy taps into academic research which incorporates a number of guiding principles, such as investing is not speculating. Another of which is the relationship between risk and return, which results in a methodical and disciplined ‘tilting’ of share investments towards ‘small cap stocks’ as well as ‘value stocks’.
At the APC Annual Client Briefing held in August (link here) we took a closer look at the performance of these ‘tilts’ with a key finding that the ‘value premium’ sought had deserted us in recent history, impacting short term returns. Taking a deeper dive, this is however not an uncommon occurrence when we look at a longer period. History has shown us that ‘value’ stocks underperformed the broader market 13% of the time in Australian markets and 17% in international markets in the 10 years up until December 2018.
If we were to look further back, ‘value’ stocks had underperformed ‘growth’ stocks by an average of nearly 6% per year for the 10 years ending 31 March 2000 leading to some at the time questioning whether the ‘value premium’ was a reliable source of excess returns and if it would be possible to recover this lost ground. Fast forward to the beginning of March 2001 (only 12 months later) and the recovery of ‘value’ stocks was such that the 10 year number had reverted from a negative to a positive with ‘value’ outperforming ‘growth’ by nearly 40% from April 2000 to February 2001.
While the value premium will seemingly ‘disappear’ from time to time it’s important to keep a long term view. While the above demonstrates the extremes, the tilt to ‘value’ stocks in portfolios has in the fullness of time, historically, resulted in an average outperformance as evidenced in our presentation.
As it happened, there has been a recent swing in the fortunes of ‘value’ stocks with the three months following the APC Annual Client Briefing showing ‘value’ stocks outperforming ‘growth’ stocks by over 2% globally.
Not for one instance are we suggesting a recurrence of the numbers leading up to February 2001 is on the cards but maybe Santa is a ‘value’ investor. Investment markets can move quickly and trying to chase the best returns can often lead to investment misery – sticking to the plan and long term fundamentals is by far the better strategy.