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The Comeback Of Value

Closing off 2016, I was very well positioned for the US elections results. My portfolio was heavily invested in financial companies, mostly in the insurance industry. The incoming administration seems intent on stimulating the economy partly through increased infrastructure spending. If inflation and interest rates go up closer to historical levels, this would be very beneficial to businesses in general and especially for financial companies, which will be able to increase their revenues by charging higher rates on their products and services. Interestingly, if we use Vanguard's exchange-traded funds as gauges of the market, Vanguard Financials ETF beat most other sector ETF's in Vanguard's lineup, as well as the S&P 500 index from November 9th to December 31st. So being overweight financials was clearly a beneficial move and prescient… or not really. I did not predict the election outcomes and I'd be skeptical of any investment manager that claimed that. My portfolio just happened to be well placed but it had nothing to do with a prediction. I simply bought or held companies, like World Acceptance Corp (NASDAQ:WRLD) or Axis Capital Holdings (NYSE:AXS), that I thought were significantly undervalued and reasonably profitable. That they happened to be some my biggest gains since then does not mean I saw anything coming. I'm about as clueless, or more, as a second-grader when it comes to politics. The core of my investment philosophy and the basis for sound stock investing in general is to simply buy what I think looks cheap and safe, not gamble on election outcomes and what they may or may not do to the stock market.

For the year, my portfolio did well enough, going up almost 16% in US dollars, compared with 12% for the S&P 500 with dividends included. It's decent given that my portfolio was at least 20% in cash most of the year and is now at 40% in either cash or bond exchange-traded funds. Value stocks in general performed very in 2016, by almost any measure, after a dismal 2015 (including by yours truly). For instance, Vanguard Value ETF (NYSEARCA:VTV) returned 17% while Vanguard Growth ETF (NYSEARCA:VUG) climbed only 6%. Some investment managers that I follow also performed very well, from Oakmark Select (MUTF:OAKLX) and Longleaf Partners (MUTF:LLPFX) to FPA Crescent (MUTF:FPACX) and Pinnacle Value (MUTF:PVFIX). International or global oriented value funds like Tweedy Browne Global Value (MUTF:TBGVX) and Artisan International Value (MUTF:APHKX) also tended to outperform their peers and benchmarks. The relatively newish crop of focused value-style ETFs like Valueshares US Quantitative Value (BATS:QVAL) and Cambria Shareholder Yield (NYSEARCA:SYLD) also did reasonably well. They are each barely a couple of years but the research behind them certainly seems solid in my view.

So, what are the general lessons to be learned? Stocks climbed up throughout the year, so it's hard to tell what the effects of the elections are. Stock markets jumped some more right after the vote but that may have been a bit premature (as I write, the markets are certainly re-assessing…). US presidential elections cause short term turbulences but, over the long term, they tend to affect stock prices only very slowly and trying to figure out their implications is a mug's game. So, while value stocks would seem to have been placed to reap supposed policy benefits, it is wholly unclear what, if any, benefits caused them to climb up. Rather, it seems like we are seeing a cyclical return to value outperforming over growth, after a few years falling behind. 2016 was enough to propel Vanguard Value ahead of Value Growth over a 5-year period, but it is still well behind on the 10-year. These performance flips tend to be very hard to predict, to put it mildly, and the results from some of these managers and myself have very little to do with our predictive capabilities (certainly non-existing in my case). Most of them to my knowledge also would not try to position themselves on political events or time the market. Rather, as alluded to previously, they invest in stocks and other securities they believe are trading well below value based on conservative estimates. It has simply may have taken the market a few years to come around to that conclusion as well, but that as historically always been the case. No need to pat ourselves on the back but we'll see if that perception continues.

Supporting Documents

  1. VFH_vs_Financials_01_-_November_8_2016.jpg
  2. VNQ_vs_Real_Estate_01_-_November_8_2016.jpg

Disclosure: I am/we are long WRLD, AXS.