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Why is value investing out of favour?

Jupiter's Ben Whitmore explains why value investing has been out of favour, and what may trigger a reversal in fortunes.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

  • Value investing has been out of favour in recent years
  • History suggests we may be due a rebound in value stocks
  • The divergence in growth and value has been fuelled by fear

Read transcript

Emma: Hello I'm Emma Wall and joining me today to talk about value investing is Jupiter's Ben Whitmore. Hi Ben

Ben: Morning

Emma: So what is value investing?

Ben: Value investing is hunting for lowly valued companies where the stock market is not that keen on them for a particular reason. The economy might be bad, or they're just out of fashion, but where you can, if you like, buy a lot of profits in cash for a low amount.

Emma: Value is a type of factor investing and there is seen a significant divergence in factors between growth and value of late. It's something that we've seen in the past, it happened in the late 90s before the dot-com bubble burst, but the drivers of that divergence that dichotomy last time around was significantly different to the drives today weren't they? What has driven value and growth to perform so differently over the recent years?

Ben: Yep so you're absolutely right the value investing has had a very tough period in the last few years. Really the difference between the late nineties and now is that the late 90s was all around optimism about the Internet whereas now my sense is it's all around worries. People are so worried about the world, very worried about disruption to industries, very worried about the prospect of a global recession, that actually it's being driven by worry not optimism. So completely different, but the same divergence between the two styles.

Emma: And in the past whenever there has been a period where value is under performed growth it has then bounced back it's been referred to as an elastic that just gets stretched to a certain point then it pings back to normality. What kind of trigger might there be that will allow value investing to come back to that kind of rolling average?

Ben: Yeah so we've looked at the ten worst periods for value investing in the world over the last hundred years and this is one of the 10 worst periods. And you're right when there's been very very poor periods for value investing in those other nine periods the subsequent five years value as a style has rebounded. Now we don't know whether it be the same this time around of course but the triggers each time have been different. People are still not quite sure over the triggers in the late-1990s - 2000. The triggers in early 1990s and also around the great depression were things getting better. So it tends to be a variety of things but normally it's it just has to be a change from the prevailing sentiment, so this time around for example the prevailing sentiment is around enormous worries about the global economy and enormous worries about negative interest rates. Something around there probably has to change

Emma: Now it has been tough, in particular six months February to August this year, for value investing and investors but presumably as a professional value investor this creates opportunities for you because you are looking for good value and there is value out there?

Ben: Yeah, as ever during a tough period for value investing you're partly thinking about I hope it doesn't get any worse anymore, but you're actually on the other hand you're thinking when you're feeling a bit more optimistic hopefully these are the seeds these investments the seeds of much better returns over the subsequent period because I'm able to buy shares at such low valuations. But as ever with things is when, when you're out of favour you're a tightrope between nervousness and optimism.

Emma: And there is of course that's difficulty with value investing, which you learn to avoid over time, what is a good value stock and what is a value trap. Perhaps you can explain a little bit more about what a value trap is and how to avoid it?

Ben: Yeah so value traps are businesses where they're lowly valued but things carry on going wrong the profits don't recover they fall away or the business needs to make a big acquisition to shore it up and actually your undervaluation is just not there and in in the worst case it's you've actually paid too much for that business. So the areas we look at to try and avoid these are we want businesses where there's a reasonable quality of business. We're not trying to pick up businesses which are poor, low margins, struggling, we don't want to take a chance with a balance sheet, we want to make sure they turn profits into cash. And by doing that you try and eliminate quite a few things you will never I'm afraid eliminate all things that's impossible. You know, the fund manager who thinks I'll get 100 percent right is delusional. But we're trying to sort of eliminate the chances of us having too many problems. A lot of the times people always think about the upside I think our starting point is the downside you know, what are the things that could go wrong, and then just a more sort of common sense thought about the business. Is it likely to be around, you know, 10, 15, 20 years’ time and if you do have like a question mark about that, that's probably something you shouldn't touch. But if, without a shadow of a doubt, you think it's definitely around in 20 years time then probably that's quite a good indicator.

Emma: Ben, thank you very much

Ben: Thank you

This video is not personal advice or a recommendation to invest. If you’re unsure about the suitability of an investment please seek advice. Investments can fall as well as rise in value and you could get back less than you invest. Past performance is not a guide to the future.

Please read the key investor information before investing for more details of the risks and charges. The views in this video are those of Ben Whitmore and may not be shared by Hargreaves Lansdown. Views correct as at 26.09.2019.

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    Important notes

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