Woe Betide the (So-Called) Value Investor

heezsafe

Jason Hsu and Vivek Viswanathan of Research Affiliates have posted an essay on the RA site with some data demonstrating how poorly value investors fail to capture the value premium that should be captured with this investment stategy. The average value investor doesn't earn anywhere near the reported value premium, under-performing the S&P 500 by -92bps, even before taking fees into account. The dollar-weighted return vs. buy-and-hold is even worse: -131 bps. There are several factors at play that contribute; if value investors hope to capture the premium, they need to get their act together, remember that the value premium itself is mean-reverting, and stop trend chasing.

http://www.researchaffiliates.com/Our Ideas/Insights/Fundamentals/Pages/365_Woe_Betide_the_Value_Investor.aspx

David_Snowball

An alternate possibility: investors won't tolerate real value investing. There are probably two hallmarks of the deep value investor; that is, of the investor who's after the "value premium" found in the academic research. First, they're willing to buy shares of firms that are either disasters or disastrously misunderstood, and then hold them for the 3-5 years that it might take for the corporation to correct its path or for other investors to realize that they'd been misjudging it. Second, they're willing to buy nothing when there's nothing to buy.

Jeremy Grantham calls it "career risk." Value investors tend to get fired before deep value investments play out, so they don't make those investments.

As a result, most value investors are "relative value" guys: fulled invested, often buyers of "the best of a bad lot." Here's a quick test of my guess: I used Morningstar's fund screener to identify all US stock funds in the "value" equity box then looked at (1) where their portfolio centroid - on Morningstar's stylebox grid, it's the black dot representing the placement of the heart of the portfolio from micro to mega and deep value to rocket growth - was and (2) how much cash they had.

574 value funds. I picked the first fund listed on each of the first 15 pages of results. Here they are:

AAM/Bahl & Gaynor Income Growth: value/blend border, 6% cash
American Beacon The London Co Inc Eq: value/blend border, 6% cash
Artisan Small Cap Value: value/blend border, 7% cash
Boston Partners All Cap Value: value/blend border, 0% cash
Columbia Dividend Income: value/blend border, 3% cash
Delaware Mid Cap Value: value/blend border, 0% cash
Dunham Alternative Income: value/blend border, 3% cash
Fidelity Advisor® Value: value/blend border, 5% cash
Franklin Balance Sheet Investment: value/deep value border, 10% cash
Great-West Putnam Equity Income: value/blend border, 2% cash
Hennessy Large Value: middle of the value box, 0% cash
Invesco Exchange: value/blend border, 1% cash
JPMorgan Value Advantage: value/blend border, 8% cash
Manning & Napier Equity Income: middle of the value box, 2% cash
Nationwide US Small Cap Value: value/blend border, 0% cash.

Of a sample of 15 value funds, just one is positioned to invest in the sorts of deep value stocks that most of the research isolates.

There are just two self-proclaimed "deep value" equity options: Towle Deep Value TDVFX (value/deep value border, 2% cash) and Deep Value E T F DVP (solidly deep value, 0% cash). Of the funds we've covered, only Pinnacle Value PVFIX (deep value, 43% cash) strikes me as seriously pursuing the value premium: Mr. Deysher buys only when a stock is at historic lows but the business seems sound, which leaves him with investors' disdain and the best risk ratios (Sortino, Martin and so on) around.

For what thought fodder that offers,

David

Ted

@MFO Members: Remember, a value stock many times is undiscovered, and once found becomes a growth stock. On the other hand, many growth stocks became value stocks because of poor earnings. Today's value stock becomes tomorrow's growth stock and vice versa.
Regards,
Ted
Growth vs. Value Investing:
https://www.fidelity.com/learning-center/investment-products/mutual-funds/growth-vs-value-investing

Value funds vs. Growth Funds IBD:
http://news.investors.com/investing-mutual-funds/030615-742276-top-performing-value-funds.htm

Vert

Doing a quick dirty check based on simple p/b, it seems as if you have to stick to small cap if you want domestic deep value. Otherwise the choices are few and far between: the Franklin Balance Sheet fund David mentioned, maybe Fairholme or Goodhaven. After that you appear to have to go up to Artisan Value (ARTLX) or maybe Poplar (IPFPX) to find anything that I've heard of.

Internationally the situation is far better for deep value. Plenty of smallcap and emerging markets. Going further up the capitalization scale, Brandes and DFA seem to be solid value shops. After that you can go to Homestead or Longleaf Partners.

I've got the feeling that Fairholme and Goodhaven and Longleaf Partners will invoke exclamations of deep disgust from many on these boards, which may be an example of why deep value has produced a major premium in the long run.

DavidV

After 5 years of bull market finding value is a real challenge. Growth funds will outperform till we hit bear market. After that value invstment will shine again, as it did during first years of bull market.