JOHANNESBURG – As Central Bankers have tried to revive economies after the global financial crisis and easy money chased stocks to new highs, many global value investors have faced trying times.
At home in South Africa, RECM founder and portfolio manager Piet Viljoen, a champion of the value philosophy (buying good quality companies cheaply) has come under fire for underperformance – also on Moneyweb.
Since 1999, when a significant portion of local fund managers considered themselves to be growth investors, there has been a shift in popularity towards value investing, with a large number of firms now citing some kind of value philosophy or bias.
However, not all value investors follow the same process. One potential difference is that some use a benchmark cognisant investment process, which arguably makes them less susceptible to severe underperformance than those – like Viljoen – who construct portfolios from a clean slate.
Different investment styles generally outperform in different conditions, but unlike growth or momentum strategies, the value style may require much longer investment periods for review. This means that there can potentially be long periods of underperformance, which typically lead to fund outflows at the firm and which may put the business under strain.
Is there a risk that value managers will change course when things get tough?
At a Navigate Investment Seminar hosted by Glacier by Sanlam, this question was put to Viljoen and two other global value managers during a panel discussion.
Dylan Ball, vice president, portfolio manager and research analyst at Templeton Global Equity Group, said value as a strategy historically has always come roaring out of the blocks after a bear market hit.
This was the case after the Japanese bubble burst in 1989/1990, in the early 1990s when the US came out of recession and after the dotcom bubble burst in 2000.
But after the market crashed in March 2009, value investing remained out of favour for a number of years.
He said value managers have got to have the discipline and the luxury to maintain their process and philosophy.
“The point at which you want to throw your process away is probably the point at which you are going to make the most money.”
Viljoen said RECM did suffer outflows, but changing their philosophy and process is “the last thing” they would do.
“It is exactly these times when you need to be in value.”
But for investors this can be tough to live with. Viljoen said he can understand why clients are getting out – their neighbours are doing well and the fear of missing out is a very strong human emotion.
He said over time the value strategy works well, but you have to be able to live with periods, which look “pretty hopeless”.
Colin McQueen, global equity portfolio manager at Sanlam FOUR, said he started his career at Phillips and Drew Fund Management in the UK.
The firm is known for not owning any internet stocks in the lead-up to the dotcom bubble. At the time it argued that it couldn’t value it.
McQueen said they didn’t buy a single internet stock and spent two years “standing in the corner” watching “companies with no sales, no earnings and a Powerpoint presentation go through the roof”.
He said the clients who did stay the course, were duly rewarded.
Viljoen also recalled his first job as a fund manager (with Allan Gray) when the firm experienced a period where the value strategy underperformed considerably and its assets under management dropped from roughly R12 billion to R4 billion.
The clients that did stay the course however, had tremendous performance over the next two decades, he said.
In his fund management career spanning almost three decades this has happened four or five times, “and it will happen again”.
McQueen said as a value investor you will typically always be early to buy a stock and almost always early to sell a stock.
He said for them it is important that a company should pass the quality hurdle and diversification within the portfolio is vital – also with regard to the economic drivers.
“History has shown people’s ability to predict the macro economy is much, much worse than their ability to understand an individual business,” he said.
But why only stick to value stocks during times when the strategy does not seem to be working? Why not blend value and momentum stocks?
While some managers do blend different styles, Viljoen said as an investor over time it pays to stick to a way of doing things that you understand and that you are familiar and comfortable with.
The difference between the value and momentum strategies is that value underperforms for long periods of time, but the outperformance is “short and sharp and tremendous”, he argued.
“It [the underperformance] is uncomfortable, most people don’t want to be there.”
He said momentum outperforms most of the time and then underperforms sharply over a short period in which investors lose a lot of money.
Viljoen said if investors are more comfortable or want some momentum they should rather find a good momentum fund manager and put the two portfolios together.
That would make more sense than asking a value investor to incorporate a little momentum, he argued.