The Adviser Issue 5 | Page 25

INVESTMENTS
“ This meant value stocks were effectively sidelined for much of the past 10 years ,” he adds . “ But that ’ s changing now .” In recent months , ‘ value ’ has been outperforming ‘ growth ’ strongly , serving as a timely reminder that value still has a lot of attractive characteristics .
Figure 1 : Value investing has underperformed for 14 years , but the tectonic plates are shifting
TRADITIONAL VALUE INVESTORS SIMPLY BELIEVE THAT THE MOST REPEATABLE WAY TO MAKE MONEY IS TO BUY COMPANIES FOR LESS THAN THEY ’ RE REALLY WORTH . AND NO ONE EVER WANTS TO PAY OVER THE ODDS FOR THE THINGS THEY BUY .
Source : Bloomberg , Russell , Invesco as at 29 April 2022 . US multi-capitalization value ( grey ) and growth ( white ) cycles since 1979 .
John Pellegry , Product Director for Asian & Emerging Market Equities , agrees . “ We have seen double-digit outperformance of ‘ value ’ versus ‘ growth ’ in our markets over the last 12 months , and this has alerted investors to the risk of letting value-led or contrarian opportunities slip by .” For him , the very notion of a demise of value investing seems strange . Traditional value investors simply believe that the most repeatable way to make money is to buy companies for less than they ’ re really worth . And no one ever wants to pay over the odds for the things they buy . “ This entails valuing businesses correctly without relying on undue optimism ,” he says . “ Valuation-focussed investors have more conviction in their ability to spot undervalued companies suffering temporary setbacks – that are priced as permanent – than they do in putting a lot of faith in the long-term growth trajectory of a business .” He believes that with renewed inflationary pressures and higher interest rates , the importance of valuation discipline is coming back the fore . The value ascribed to earnings or cash flow generated far into the future is worth much less in today ’ s money . And inflation is a topic that Neville Pike , Product Director for UK Equities , has already highlighted last year . “ We said that it would put pressure on high-value stocks and favour shorter duration stocks ,” he says . “ And the terrible events in Ukraine have only sped up the pressures that were already clear to us then .” Among them , he lists the rapid increase in prices for energy , consequential further disruption to supply chains and the likelihood of increases in the price of agricultural commodities over the rest of the year . With his expectations having come to pass , equity markets have favoured shorter duration stocks year-to date . And while he hopes that lasting peace can soon be found in Ukraine , the underlying pressures on inflation – and on companies – are unlikely to reverse soon . “ The next 10 years are going to look very different from the past 10 ,” Neville says . Joel nods . “ In Europe , we believe the investment regime will be radically different to what we ’ ve had since the global financial crisis . More fiscal , less monetary – with a change in the key structural drivers . Examples include the green transition , more regionalisation and building more secure supply chains closer to home .” Such an environment would be supportive of economic growth in the medium term and be a much better backdrop for ‘ value ’ stocks . However , he notes that the European Equity team is less concerned with labels and instead focusses on valuation . “ This means being able to buy companies with potential , ability and willingness to change for the better , which hasn ’ t been recognised by the wider market ,” he says . “ Exploiting these valuation opportunities is key to our approach .”
The Asian & Emerging Market Equities team takes a similar approach . In their view , value investing can also mean buying highquality and / or high-growth companies when they ’ re no longer perceived as such . “ Companies go through cycles ,” John says . “ Previous market darlings can fall from grace . We believe the risk-reward is more favourable when there is little optimism built in .” When a consensus starts to emerge in the market that a stock , style , theme or market is dead or permanently impaired , it ’ s music to the ears of value investors . Not only is the downside limited if the company is sound , but the odds of beating expectations is greater when excessive pessimism sets in . “ As active investors we look to capture these risk premiums , which could over time lead to better investment returns ,” he adds . Value investing is dead ? Far from it . Long live value investing .
Valuation opportunities Some say value investing is back . We say it never left . Keen to learn more ? Visit invesco . com / value or scan the QR code below to visit our valuation opportunities page for :
• CPD-accredited training modules
• value tracker tool , showing which markets currently look expensive and which look cheap
• our capabilities , covering both passive value tracking and active valuationdriven investing .
Risk warnings The value of investments and any income will fluctuate ( this may partly be the result of exchange rate fluctuations ) and investors may not get back the full amount invested .
Important information This content is for Professional Clients only and is not for consumer use .
Where individuals or the business have expressed opinions , they are based on current market conditions , they may differ from those of other investment professionals and are subject to change without notice .
Issued by Invesco Asset Management Limited and Invesco Fund Managers Limited , Perpetual Park , Perpetual Park Drive , Henley-on-Thames , Oxfordshire RG9 1HH , UK . Authorised and regulated by the Financial Conduct Authority .
# 05 | SUMMER 2022 | 25