Sunday Times

Value in­vest­ing in the 21st cen­tury

- By ADRI­AAN PASK Pask is the Chief In­vest­ment Of­fi­cer at PSG Wealth. PSG Multi-Man­age­ment (Pty) Ltd. FSP 44306. For more in­for­ma­tion, visit www.psg.co.za

Al­though there are sev­eral in­vest­ment styles you can choose to fol­low, value in­vest­ing has proven to be one of the most suc­cess­ful strate­gies over time. Al­though it has fallen out of favour since the 2008 fi­nan­cial crisis, it can still of­fer value.

Value strate­gies usu­ally per­form the best when the mar­ket is un­der se­vere pres­sure. But mar­kets, es­pe­cially those in the US, have not been un­der real pres­sure since 2008.

In­stead, the US mar­kets have en­joyed one of the long­est bull runs in history. This en­vi­ron­ment has been con­ducive to growth strate­gies, which have be­come more pop­u­lar.

So, some in­vestors have started com­bin­ing other fac­tors with value strate­gies to cap­ture any growth in mar­kets.

Value in­vest­ing 101

Value in­vest­ing is driven by the con­cept of in­trin­sic value. It can be con­sid­ered the cor­ner­stone of value in­vest­ing and is cal­cu­lated through fun­da­men­tal anal­y­sis to de­ter­mine the present value of fu­ture cash flows of a spe­cific share or com­pany.

The in­trin­sic value of a com­pany is gen­er­ally far more sta­ble than the price the mar­ket as­signs to a share.

This cre­ates op­por­tu­ni­ties to buy un­der­val­ued shares and avoid risks as­so­ci­ated with over­priced shares. By buy­ing a share when it’s low, in­vestors can make sig­nif­i­cant prof­its when the share’s value rises.

Sim­i­larly, given that the share is al­ready trad­ing at a dis­count, your down­side would not be as large. By fo­cus­ing on a com­pany’s in­trin­sic value (the num­bers), value in­vestors have an edge over other in­vestors who open them­selves up to the ir­ra­tional­ity of mar­ket volatil­ity (the sen­ti­ment).

Be­fore com­mit­ting to a spe­cific share, value in­vestors in­ves­ti­gate fac­tors such as:

● Earn­ing pat­terns;

● Free cash flow;

● The cost of cap­i­tal; and

● The mar­ket price of the share.

How has value in­vest­ing evolved?

By con­sid­er­ing other top-down fac­tors, such as macro­eco­nomics and geopol­i­tics, which were not con­sid­ered by value in­vestors tra­di­tion­ally, value in­vest­ment as a strat­egy has evolved. It has be­come im­per­a­tive to ad­just strate­gies to suit cur­rent times.

In­vestors must con­sider cer­tain macro events that can in­flu­ence a com­pany’s per­for­mance, as well as rely on new skills and tools to in­ter­pret the avail­able data.

Rather than fo­cus­ing on one in­vest­ment ap­proach to the ex­clu­sion of oth­ers, PSG

Wealth fol­lows a multi-man­aged in­vest­ment ap­proach. This means we are prag­matic and em­brace var­i­ous strate­gies so that we can build ro­bust port­fo­lios for our clients. We fo­cus on facts and dis­ci­plined de­ci­sion-mak­ing, in­stead of be­ing caught up in the emo­tional re­sponses of­ten sparked by mar­ket volatil­ity.

For this rea­son, our multi-man­age­ment ap­proach com­bines dif­fer­ent man­agers, in­vest­ment ap­proaches, re­search strate­gies and an­a­lyt­i­cal in­ter­pre­ta­tions to en­sure we pro­duce di­ver­si­fied port­fo­lios. We in­vest time and re­sources in pro­duc­ing re­search that pro­vides our clients with in­sights and the abil­ity to make in­formed de­ci­sions.

We aim to de­liver more sta­ble re­turns in our port­fo­lios, es­pe­cially com­pared to funds pre­fer­ring to in­vest in ei­ther a pure value or pure growth strat­egy. Ul­ti­mately, we be­lieve, a prag­matic ap­proach is bet­ter suited to de­liv­er­ing con­sis­tent above-av­er­age re­turns. Over time, these add up to bet­ter in­vest­ment out­comes for in­vestors and, thus, a greater like­li­hood of them achiev­ing their goals.

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Adri­aan Pask

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