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Investment views

Focus on Fundamentals, not style

18 September 2019
Authors: Ian VosePortfolio Manager, Rhynhardt RoodtCo-Head of 4Factor, Mark BreedonPortfolio Manager
  • We believe the persistent and broad-based nature of value underperformance is driven by structural and cyclical factors, preventing the occurrence of mean reversion.
  • While these headwinds could persist, we believe investors should be mindful that the relative performance of growth and value can change suddenly.
  • There is also upside potential for value, especially considering the spread between the valuations of the cheapest and most expensive stocks is at the extreme wide recorded during the global financial crisis.
  • Rather than relying upon returns from a sector rotation from growth to value, we believe on focusing on opportunities within the sectors.
  • This approach allows us to maintain a style-agnostic portfolio and our disciplined process allows us to aim to avoid value traps alongside overhyped growth names.
  • How we assess value is important in an age of disruption and we believe 4Factor’s focus on quality, value and operational improvement will be rewarded in the long term.

Value may be challenged, but it isn’t dead

What has been surprising about value’s underperformance is not just its persistence, but also its breadth and scale. It has significantly underperformed across regions and sectors and any signs of its re-emergence as a driver of outperformance have been short lived, as we saw this year.

As we explore in this paper, value investing remains challenged, for both cyclical and structural reasons. But in our view, it isn’t dead. We believe value’s effectiveness as a predictor of returns will in time revert to the mean as markets begin again to be driven by fundamentals.

Our process allows us to construct balanced style-agnostic portfolios, where diversification is enabled through the factors. We do not focus upon returns from sector rotations, but rather aim to achieve performance over the long term through an eventual appreciation in fundamentals.

As we have argued in this paper, it is extremely difficult to predict how long the current regime, which is not favourable for value stocks, will last. But we remain firmly convinced that the relative performance of factors, such as value, will eventually revert to the mean. Consequently, we believe that 4Factor’s focus on quality, value and operational improvement will be rewarded in the long term.

Read the viewpoint

General risks: The value of investments, and any income generated from them, can fall as well as rise. Where charges are taken from capital, this may constrain future growth. Past performance is not a reliable indicator of future results. If any currency differs from the investor's home currency, returns may increase or decrease as a result of currency fluctuations. Investment objectives and performance targets are subject to change and may not necessarily be achieved, losses may be made.

Ian Vose
Ian Vose Portfolio Manager
Rhynhardt Roodt
Rhynhardt Roodt Co-Head of 4Factor
Mark Breedon
Mark Breedon Portfolio Manager

Important information

This content is for informational purposes only and should not be construed as an offer, or solicitation of an offer, to buy or sell securities. All of the views expressed about the markets, securities or companies reflect the personal views of the individual fund manager (or team) named. While opinions stated are honestly held, they are not guarantees and should not be relied on. Investec Asset Management in the normal course of its activities as an international investment manager may already hold or intend to purchase or sell the stocks mentioned on behalf of its clients. The information or opinions provided should not be taken as specific advice on the merits of any investment decision. This content may contains statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, new legislation and regulatory actions, competitive and general economic factors and conditions and the occurrence of unexpected events. Actual outcomes may differ materially from those stated herein.
All rights reserved. Issued by Investec Asset Management, September 2019.

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