Jens Moestrup Rasmussen, chief portfolio manager at Sparinvest, has argued at the recent Nordic Investment Managers Forum Luxembourg that investors are ignoring value investing at their peril given the prevailing investment environment.
Further to his comments at the event (www.nimf.lu) Rasmussen has spoken with InvestmentEurope about his broader views of value investing and its place in the toolset used by investors.
Is it easy to find value at the markets right now?
First and foremost, we’re bottom up stock pickers, so for us it’s always about finding individual value ideas, and we certainly can find some. At the general level, it’s fair to say that equity market valuations have generally increased somewhat from the lows of a few years ago, so it’s not as easy as it was. But there are wide valuation dispersions in the market, and value investing is often about exploiting such dispersions. We find the US generally looks rather pricier than Europe and Japan, but even within the US we see significant valuation gaps between styles and industries. For example, some of the more defensive areas like consumer staples trade at lofty valuations, while cyclical areas appear rather cheaper. Meanwhile, emerging markets have been rallying strongly this year, but we still see some good value across that universe.
How do you identify the most attractive investments in this big universe?
We have a rigourous investment process, which starts with screening the universe based on various measures of valuation and fundamental strength. Some screens are very general, while others are more specific, looking at countries or industries where we think there could be an attractive pricing opportunity. Often we are looking for stocks that are out of favour for some reason, where perhaps we think the long-term opportunities outweigh the short-term challenges. In any case, we’re trying to seek those companies where there’s potential for the current market price to be significantly discounted to the long-term intrinsic value of the company. We take those screening results, and gradually sift to a short list, pulling in more information as we go. Of course, we also get ideas from other sources – simply following the news, ideas from stockbrokers, and so on – but the aim is that we will compare those ideas to the broader universe, to see how they fit in from a valuation and fundamental perspective. We end up with a few stocks which we will analyse in depth, and it’s only as we do that, that we start to get a clearer idea of how attractive the company, and its current pricing, are.
How important are the value strategies for Sparinvest?
Overall, Sparinvest’s investment strategies aim to be prudent and focused on long-term returns, and we think that’s fairly consistent with the original conceptions of Ben Graham, the father of value investing. The value equity strategy has been a core strategy for Sparinvest for close to twenty years now, so it’s fair to say it’s part of the company DNA.
Is value investing a way to outperform the market over longer time horizons?
We certainly think so. Value investing is defined in different ways by different people. Ben Graham is seen as the father of value investing, really establishing the concept of distinguishing between market price, and intrinsic value – the underlying worth of the company, estimated on the back of thorough analysis. At the broadest level, we’re convinced that such work pays off in long-term returns. But also, there are many academic studies of value investing, which tend to define value by certain metrics, such as price-to-book, price-to-earnings, and so on. That body of work points to a strong value premium over time: investing in cheaper stocks helps to outperform the market over longer time horizons.
Value is an unloved category. Why is that so and do you think it will change in the near future?
We know, of course, that there always have been and always will be periods where value underperforms, and the last few years have been such a period. When any category within investment underperforms for a few years, of course people’s faith gets tested. We’ve heard people declaring that value investing is dead, but we’ve heard that plenty of times throughout history! Historically, the periods of value underperformance have ended, and often have ended quickly – so there can be a risk to having no value exposure.
Each value cycle has its own drivers, and one aspect that we think is relevant in recent years is the link between interest rates and value performance. Obviously the past few years have been a period of low and falling interest rates, and this tends to benefit growth stocks. That’s partly due to the mechanics of cash flow valuations: growth stocks have more of their expected cash flows further in the future, and as interest rates drop, the discount rates used in valuations also drop – pushing up the current value of those future cash flows. Meanwhile, the last few years have been a period of economic uncertainty and low bond yields, so investors have been on the hunt for defensive, stable, and high dividend yielding companies. That has led to rather a concentration in certain parts of the stock market, which have arguably got rather pricey. Meanwhile value has been neglected, and got cheaper. As interest rates start to point mildly upward – as is happening in the US – it’s possible that will lead to something of a reversal of the trade of the past few years
For more information on the Nordic Investment Managers Forum visit www.nimf.lu