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- 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.
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.
