The Misery of Value Investing

A recent article in Institutional Investor discusses the challenges faced by value investors and the reasons behind them.

“There’s no single reason for this unprecedently bad run for value investing,” the article notes, adding that investors have blamed everything from interest rates, indexing, regulation and lofty share valuations for the poor performance. The article highlights the following contributing factors:

  • Price differential: Some investors blame the growing chasm between value and growth stock valuations, particularly FAANG stocks: “These investors view value stocks’ long period of underperformance as merely a painful side effect of the decade-plus-long rally in growth stocks—a run of outperformance that has pushed stock valuations to the extremes, with these tech giants leading the way.”
  • Accounting for intangibles: Not everyone agrees that the market is overvalued, however. The article cites comments from Brad Neuman, director of market strategy at Alger, who argues that the ways investors differentiate between cheap and expensive stocks has become “dramatically skewed” in part because of accounting practices related to intangible assets. He explains, “They’re expensed, not capitalized, which means they don’t show up in book value,” a point that the article notes has been gaining a lot of attention in both financial and academic circles.
  • Definition: Value investing involves more than just identifying cheap companies based on price-to-book, but rather finding profitable and financially stable companies that are reasonably priced.
  • Corporate profits: Research Affiliates CIO Chris Brightman argues that value’s long period of underperformance is due primarily to the increase in corporate profit margins that has been fueled by low interest rates, low taxes and stagnant wages. This is echoed by GMO’s Ben Inker, who says, “High-growth companies have been able to retain growth for longer, and the somewhere-between-boring-and-crappy cheap companies have had a harder time generating excitement about them.”