‘Value’ failed the Covid-19 test, but is the style dead?

Market turbulence caused by the Covid-19 economic fallout may have claimed another victim: “value investing”. Funds and stocks favoured by “value” investors have failed to perform in the recent market slump despite expectations of the opposite.

Value stocks, those perceived to be valued more cheaply than the true worth of the business, tend to perform better than average in market dips: their share prices, theoretically, have less distance to drop because the stocks are already lowly valued.

However, this has not been borne out. Globally, value stocks have shed 20pc. “Growth” stocks, which should fall harder and faster in bear markets, have dropped by a mere 4pc. The disappointment for value investors is the latest in a long series that began with the 2008 financial crisis.

Some of the losses can be explained away because traditional value sectors have struggled. Banks have been hit hard as interest rates have been cut worldwide to boost the economy. These rate cuts directly and negatively affect banks’ profit margins. Similarly, energy companies have been affected by oil price volatility and miners hit hardest by a near-halt to manufacturing.

However, many value investors are conscious that the investment style has not worked for more than a decade and the factors behind its recent poor form have just become more prominent.

Value investing has struggled mainly because of interest rates and low market confidence. Investors have instead favoured secure “quality” companies with safe dividends and predictable earnings, or backed tech stocks. Neither fall into the value category. With interest rates cut once more and economies heading into reverse it’s unlikely that value stocks will recover soon.

Darius McDermott of Chelsea Financial Services, a fund shop, said: “There is no reason to think what has happened in the past decade will change now. We are heading into a recession, and in these circumstances company balance sheets are important. Quality and growth companies tend to be much stronger than value stocks in that department.

The ‘value’ investment style has failed to make headway for years, say Sam Benstead and Jonathan Jones

They are more likely to survive and therefore gain market share, too.”

Fund managers have started to change the way value is perceived in an effort to protect portfolios. Highprofile value stockpickers have been buying growth companies hit in the market sell-off, rather than traditional value stocks (see box). Short-term buy and sells could help protect their investors from a prolonged period of poor returns.

Despite the odds stacking up against value investing, there are plenty who stand by the style and point to its long-term record. Value funds have historically done well, the past decade aside. Over 20 years, value stocks returned more than their growth counterparts. Rory Maguire of Fundhouse, an investment research firm, said: “If you looked at historical price to earnings (p/e) ratios, a measure of how cheap a stock is compared with its earnings, buying at the low points and selling at the high points brings exceptional returns.”

He argued that being contrarian and buying unloved stocks, with patience, is key to building wealth.

Just because the past decade has been bad for value does not mean that the investment style has no worth, according to Kasim Zafar of EQ Investors, the wealth manager. The past decade’s poor returns have been down to industry-specific issues rather than problems with “value”, he said.

Mr Zafar said this could be reversed if there were a resurgence in the oil price or if a fiscal package from the Government protected businesses

‘In the past, buying at the low points would have brought you exceptional returns’