In a recent investing masterclass, longtime friends Joel Greenblatt (Gotham Funds) and Richard Pzena (Pzena Active Management) shared insights on the state of active management and what it means to be a value investor.

Here are some highlights from their comments:

• As to whether value investing is dead, Pzena rebutted, “Value is not low price-to-book. That’s a factor. Value is a philosophy. It can’t be dead—it’s buying something for less than it’s worth.”
• Although many look at the last decade as an “anti-value” decade, Pzena argued that it was “actually a normal value decade. Returns were about the same as the decade before and the decade before that. What was different was that growth went nuts.”
• If you took the cheapest stocks over the last seventy years and compared them to the most expensive stocks, Pzena noted, “you would find something quite fascinating:” The multiple paid for the cheapest stocks has stayed the same while the multiple paid for the most expensive stocks has tripled. He explained that this has been driven primarily by “forty years of declining interest rates.”
• While the pandemic has made it difficult to look at current metrics of earnings and cash flow “as indicative of what’s normal,” according to Pzena, if you accept that economic conditions will correct back to more typical, there are opportunities. “Many companies are selling at 10 times or less their normal earnings,” he noted, “If all I was doing was buying those companies and expecting normal economic growth…I would bet that we would average better than 10% returns per year over the next decade. I don’t think that’s remotely possible buying the S&P 500.”
• Greenblatt offered data to illustrate his optimism about “the opportunity set” as a value investor: In 2019, he said, 359 companies with market caps of over $1 billion lost money. “If you just bought those companies, in 2020 your median return would have been 65% and your average return would have been 120%.” He quipped, “And it’s the world’s worst investment strategy.”
• Pzena weighed in on interest rates: “If I can create a cash flow stream that I’m reasonably confident is going to give me a total return in excess of 10% a year, I’m mostly indifferent what happens to interest rates.” Growth stocks, he asserted, have “ballooned not because of low interest rates but because of falling interest rates. That’s what creates the tailwind to valuations.”
• Both Pzena and Greenblatt agreed that ESG and value investing intersect. Pzena cited preliminary research suggesting that “companies that improve on their ESG scores tend to outperform,” and concluded, “There’s a way to actually not abandon being a value investor but being cognizant of the issues of sustainability on a company’s earnings.”