Is value overlooked?

Value investing – the art of buying stocks which trade at a significant discount to their intrinsic value – has yielded generally poor returns over the past decade.

Nonetheless, deeper analysis suggests pools of attractive value remain available to astute investors.

Value investing isn’t always in favour and doesn’t always outperform over shorter periods. Over the last century, there have been many periods where buying cheap stocks hasn’t been a short-term vote winner.

So why has value failed to perform since the 2007 financial crisis? Remember, value stocks are cyclical, less stable and more sensitive to the wider economy than other companies. They’ve, therefore, struggled in the long, slow economic recovery since 2007 and investors have, as a result, shunned cyclical stocks in favour of “safer” secular growth stocks.

However, that’s not to say there haven’t been pockets of value. In materials and utilities sectors, value has actually outpaced growth over 10 years and it could be argued that much of the underperformance in the value index has been due to the absence of a few big technology stocks and an overweight in banks.

Further, when comparing past earnings with the likely future growth implied by current equity valuations, such a market dislocation may be a precursor to value outperforming, as expensive growth companies withdraw to lower valuations.

Globally, the majority of the performance gap between value and growth can be attributed to the higher price/earnings multiples of growth stocks and while the price of growth stocks has outstripped their higher earnings-per-share (EPS) growth, the market has largely ignored the EPS growth of value stocks.

This means the market currently overrates growth stocks significantly, while underrating value stocks. Due to their recent popularity, growth assets like Facebook, Apple, Amazon, Netflix and Google (Alphabet) have come to represent overcrowded investments with expensive valuations, while value stocks have been largely overlooked.

Tom Mann is portfolio manager at Schroders