O’Shaughnessy Insights on Value’s Terrible Performance

In a recent interview on the Bloomberg Markets Odd Lots podcast, O’Shaughnessy Asset Management (OSAM) co-CIO Chris Meredith talked about value’s long period of underperformance and shared some insights regarding the outlook and potential catalysts for a reversion.

Here are some highlights from Meredith’s comments:

  • Big technological discoveries have led to value’s underperformance. To gain perspective, OSAM looked at data going back to 1926 to see if there were any other periods with similar characteristics.
  • They found that during the period between 1926 and 1941, “manufacturing names were the tech stocks of the day,” with automobile stocks showing growth characteristics while railroads and utilities were dragging (much like financial stocks in today’s market).
  • Innovation impacts value investing, says Meredith, because it leads to short term outperformance of growth. But, over time, when the innovative technologies become “embedded” and more traditional companies start using them, then value names benefit. Meredith uses the example of Dominoes—not considered a growth stock but saw huge benefits once they adopted technology through expansion of its mobile platform. Meredith says the company has been “crushing it” since then.
  • While tech companies introduce the innovation, this is typically followed by a period when “other companies start adopting platforms and then using technology broadly to expand their economic models.”
  • The hardest part for value investors, Meredith says, is “keeping to a discipline when a strategy is working against you. Obviously, this has been a painful period. You want to see it revert back in a quicker fashion. But what we feel would be the worst thing to do would be to abandon our principles at this point. We see there are signs that we’re coming towards the end of this.” While it’s difficult to time the market, Meredith notes that OSAM’s approach involves looking across entire companies to determine where opportunities may exist, including analysis of balance sheet and leverage levels, quality of earnings, momentum and quality of management.
  • Although the turning point for value is difficult to identify, Meredith says, “What we have is the ability to look at historical trends. That’s the benefit of being a quant. I’ve got 92 years of data and can look through a long historical lens.” He says we’re living through a “cluster of technological innovation” now which, at the very least, can offer some perspective. The technological standards are in place, he concludes, which suggests that “normal” companies can now adopt those broad technologies and “participate in the economic boom” they have created.