Current factors unfavourable for value investing

The current economic environment typified by low interest rates does not favour the theory of value investing, but instead presents a better setting for a growth investing approach, a senior executive at a share research and funds management firm has said.

“Traditionally growth-hungry businesses have a thirst for capital and will love environments like we are currently in right now, notwithstanding rising bond yields that we all know are coming, but will still not be enough to warrant a value investing strategy,” Lincoln Indicators executive director Elio D’Amato told the Australian Shareholders’ Association 2018 Conference in Sydney in May.

“It is difficult to quantify many of the assumptions a value strategy actually needs in order for it to work correctly.”

According to D’Amato, the assumptions in question include forward estimates, a prediction of all the relevant active risks, gauging the level of active risk, and how much it will impact on stock return.

He pointed out investing in quality companies was a more prudent investment theory to apply.

“Our testing basically found the simple premise that good things happen to good companies, it’s as simple as that,” he said.

“And often when you find a stock which as the pants fall out of it and you’re very disappointed in the performance, traditionally it won’t be from a good company, whereas your good companies will do well.”

An awareness of undervalued stocks in general does not necessarily make value investing a prudent strategy, he pointed out.

He used the period following the global financial crisis (GFC) in 2008 as an example.

“After the GFC, being a value investor actually cost you significantly. Why? Because everything was cheap, but then everyone had written down their expectations and forecasts for these businesses to the extent that even cheap businesses became expensive,” he said.

He explained this highlighted a further challenging element to consider with regard to value investing.

“So this idea or concept that you have to identify value has one key input and that is expectations. Now if anyone can tell me someone who gets expectations right 100 per cent of the time, good luck to you,” he noted.


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