Is Value Dead? 9 comments
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As Dan Weiss writes in this blog, we have seen the market undergo a radical shift since midyear. The first-half darlings are so far 2nd-half disasters, and vice-versa. As Dan says, there is no way to know if this is the start of a long-term trend or just another bear market spasm.
One group of investors that is certainly counting on a long-term shift, whether now or later, is value investors. The recent performance of value managers with long-term records of trouncing the market has been awful. Gurufocus.com reports that market legends like Marty Whitman, Monish Pabrai, and Robert Rodriquez have seen recent stock picks pounded by the market to the tune of more than 30%. Many other similarly decorated value managers have also seen painful declines. Bill Miller, Wally Weitz, Bill Nygren, Chris Davis, the list goes on an on.
Each of these managers continues to experience major asset outflows. Are these outflows justifed? Is value dead? Have all these guys who used to be so darn smart suddenly become dumb? Were they all just lucky?
Let's look at the facts.
Fact 1: Mutual fund investors have a terrible record of timing the market. John Bogle, the founder of Vanguard, noted in a recent report that from 1984 to 2002, the S&P 500 returned 12.2% annually. The average mutual fund investor achieved returns of a mere 2.6%. Why? Performance chasing. Jumping in and out of funds at just the wrong time.
Fact 2: James Montier (Societe Generale strategist) reports on a study by the Brandes Institute that shows that the very best long-term fund managers frequently suffer notable bouts of underperformance. They looked at the managers with the best 10-yr performance. 75% of these managers had at least one year where their performance was in the lowest 10% of all managers. Even when looking at 3-yr periods, fully 20-30% of these best managers were in the bottom 10% of all mangers. Montier quotes one manger he recently visited as saying, "What you are telling me is that to help my clients in the long-term, I should really suck now."
In all seriousness, this points out that even the best managers cannot be expected to outperform every quarter, year, or even three year period. This is what makes it so tough for individual investors - if you are constantly staring at your investments and comparing their performance to the market, how do you know if a period of underperformance is temporary or permanent? The only answer I can offer here is that investors should focus on the investment process and the long-term performance of their managers. And then they should let them do their jobs, for a long time.
Fact 3: Montier reports in the same paper that value investing periodically goes through 2-yr periods where it underperforms glamour investing, sometimes woefully. By glamour he means those stocks and sectors that are in the headlines and on the business networks - those stocks that keep going up with no visible means of support. Recently this had been energy, material and commodity/emerging market plays. In 1999 we all know it was tech, internet and telecom. The underperformance of value (low price to cash flow) stocks in 2007 and 2008 has been even worse than that in 1998-1999. The good news is that in each of the past 5 examples (the first being in 1959-60) value subsequently outperformed glamour by 17% PER YEAR for an average of 7 YEARS!
I know that in my own portfolios it has been a tough year, since I have pretty much been leaning against glamour without any hedging on the short side. However, over the past month, my stocks have outperformed handily. Is it the start of a new trend? I have no idea. It feels like it could be. All I know is that one day, the new trend will in fact start and I believe value will undergo a dramatic rebirth, as it always has.
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This article has 9 comments:
Mr. Bogle is, of course, correct regarding his observation of many mutual fund "investors' " poor sense of timing. The very fact that these funds are experiencing such large outflows could be considered, in and of itself, a contrarian indication that "value" could well be at or very near a bottom, in terms of "investor" popularity.
Is value dead ? Hardly.
If you simply invest in low PE as value, you have been burned in the past year and will continue to get burned until the credit crisis is nearer to resolution and it becomes clearer where the world is in the current economic cycle.
The bottom line is that value outperforms growth in the long term. However, there are times (like now) where value underperforms for a while. Value is based on fundamentals and right now fundamentals have too many unknowns.
The problems with this come to the fore when they are wrong and the market was right. The stubborn ones hang on to the their FAN and FRE and BS, assuming they'll be right some day.
It seems to me that it is healthy to recognize early enough when you are wrong and get out. Focus on the losers and the winners will take care of themselves.