Value Investing Offers Diversification

Value Investing Offers Diversification

The value investing strategy—acquiring shares of companies that are trading below their fair market value—had fallen out of favor in the 2010-2020 decade as high growth businesses dominated the market. But value is now outperforming growth with a 10% CAGR (compound annual growth rate), according to an article in Financial Express.

Value tends to outperform when other factors such as momentum, quality, and low volume are underperforming. Different analysts or managers have different methods for determining the intrinsic value of a company, relying on their own specific set of assumptions to determine the company’s future performance. Some managers rely on ratios like price-to-earnings (P/E) or price-to-book (P/B) in order to weed out overvalued companies from undervalued ones, the article explains.

Including value in your portfolio can bring in a high level of diversification, especially during a recovery; history shows that value typically outperforms during a rebound period after a downturn. Where the market generated 36.5% CAGR on average during a recovery, value produced 45.1% CAGR—a significant outperformance of 8%. But during the actual downturn, data shows value underperforming at the same rate of 8% CAGR on average. That indicates that value is particularly sensitive to the ups and downs of the economy, making it a “pro-cyclical” factor. Because of that sensitivity, investors should consider value investing as a complement to the core of their portfolio, rather than the dominant strategy, the article concludes.


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