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The shift to value investing is underway

‘Returns from passive index funds in the medium term are unlikely to excite.’

Over the last 12 months we’ve seen a shift in factors that have driven investment returns. Although returns from value investing seem to have recovered, there is evidence to suggest this recovery is still in its early stages. This shift has important implications for where investors should expect to find returns over the next seven to ten years.  

While data proves that value investing outperforms growth investing over time, returns from growth and passive index investing have strongly outperformed value since the Global Financial Crisis. Given the length and depth of value’s recent underperformance, the size and speed of the recovery has been remarkable.

This recent experience counters the misperception that value investing only comes to the fore during a market collapse. In this instance, value’s outperformance has come while the MSCI World Index continued its rise, while the JSE/FTSE All Share Index was in essence flat.  

Simple mean reversion would suggest that if the relationship between returns from value and growth investing reverts to its long-term trend, there is still considerable scope for outperformance. However, there are other fundamental factors to consider.

One of the primary drivers of growth’s strong performance has been the artificial suppression of global interest rates to reflate asset prices after the financial crisis. With interest rates close to zero or even negative, this crucial support no longer applies – interest rates simply can’t fall meaningfully from current levels.

With interest rates and inflation likely to rise going forwards, this bodes well for value stocks which tend to perform well in rising interest rate environments. This, combined with the extent of the dislocation between the valuations of growth and value stocks, provides a strong tailwind which we believe will continue to favour value as an investment style going forward.

The flow of funds into passive index trackers has supported the momentum in the market and while investors have done well to follow a passive strategy for the last few years, returns from current levels are likely to be more modest.

Passive vehicles buy into the highest priced shares since these make up the biggest part of indexes. They also neglect underpriced value shares, which become an increasingly smaller component of the indexes, leaving passive portfolios strongly biased towards expensive growth stocks at this point in the market.

Investors have tended to prefer the investment style that has historically performed best up to that point, and allocate funds accordingly but end up with disappointing returns thereafter as a result. For example, fund flows into hedge funds – the most actively traded investment vehicles – peaked shortly before hedge funds started to underperform broader markets. 

Current fund flows into passive investment vehicles are stronger than ever. We would argue that at current market levels, returns from passive index funds in the medium term are unlikely to excite.

RECM’s performance over the last few years has directionally followed other value investment styles –in terms of the underperformance prior to 2016 and the strong recovery in performance thereafter. The fundamental reasons that value investing should and does outperform over the long term remain in place. Value investing exploits the foibles of human nature which create the greatest inefficiencies in the market, and nothing about those foibles has changed. RECM’s funds have performed strongly over the past year and we believe that the recovery still has a long way to go.

RECM chairman Piet Viljoen recently featured as our weekly market commentator. He speaks about SA’s crisis in confidence, whether it’s a good time to buy banking shares, which businesses are undervalued at the moment and whether the value style of investing is soon to make a comeback. To download the audio in full, click here


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The barber always tells you that you need a haircut; I wouldn’t expect any other message from a fund Manager.

So you are trying to justify your performance fees going forward.

Now I wonder how 10X and Sygnia are going to justify their (smaller) fees by just following an Index and not providing any value-add? Paying their fees is merely going to their profit and admin fees.

Paying the active managers fees also only go to their profits and admin fees. If you can track an index for less, then do it.

No incorrect, paying active managers fees does not only go to admin and profits; performance fees reflect outperformance, which reflects the active managers ‘skills’ aka. ‘value-add’.
So why do you even want to pay (less) fees by merely tracking an Index? Why should you pay ANY fees to track an Index? Especially as it is a fixed percent, irrespective what returns you receive? There is NO SKILL in investing in an Index, anyone can do it, and if returns are negative, they blame the index!!???
Choose the 20% of Fund Managers that consistently outperform the Index.

Well, they can’t track an index for nothing. There are admin costs and such to cover and IT systems to build and maintain and more.

If 90% of the population (aka the weight) went with the 20% of fund managers that outperform the index (because why would anyone want to be with someone who underperforms?), the index would then rebalance and then be near the middle of performance of that 20%. So the next time performance is measured, then only ~10% would outperform the index and the 90% of managers would perform worse than the index. It’s the only logical outcome.

@Supersunbird…..I will repeat my last paragraph above:

Choose the 20% of Fund Managers that consistently outperform the Index.

Its just as well there are investors that differ from me; I dont want 90% of the population to invest with the 20% that outperform the Index.

Agreed gerry. This article is a ” crock of crap”. Very few to zero active managers beat indexes over all time periods….but esp not after 10 years plus. This is due to the fact that they charge obscene fees. If piet is so sure of his case…i’ll issue my standard challenge to all active managers…ie…i give you my hard earned cash and you guarentee me just 1-2% over index performance per year. Surely that should be easy considering the future market conditio s which will favor active investi g as per the article. As usual i expect a deathly silence to this challenge.

Piet, you might be right, but you might be not. I won’t bet my cash on a manager who’s equity fund has underperformed the benchmark by 165% since inception. And still charges a management fee of 1.9%! Regardless of current market conditions or investing cycles – no chance.

Agree shocking that MW still puts this waned star on it’s site.

Neddbank Managed and his own funds absolute disasters. The fact that he has 1 good year amongst about 10 bad one says what?

Shouldn’t there be a health warning that RECM has misread the stock market for seven years running or can anyone provide financial forecasts no matter what? Imagine a doctor or engineer with a similar track record dispensing advice to the public.

“We would argue that at current market levels, returns from passive index funds in the medium term are unlikely to excite”. Off course is will not excite, unless the whole markets returns excite. It will be the average of the poor performers and the great performers and their relevant weightings. You will not be in the under performing funds and you won’t be in the top performing funds, but at least you will not be paying a lot if you had ended up choosing a underperformer (which maybe before had been a top performer).

if Warren Buffett suggests putting 90% of his estate in an index fund – why shouldn’t everyone! this guy is like the Cunard Line selling tickets for the Titanic’s last voyage! – vested interests!

aren’t you brave enough to use your own name – simply adding a full stop behind my name doesn’t make you THE robertinsydney. as they say “imitation is the purest form of flattery”. have reported you!

John Biccard of Investec was for years quoted and loved. Then came years of low performance and he was then blasted. Of course, as things always change, his Value Fund began to perform and he is being loved again.
Three things to notice:
1) His investment philosophy did no change during all these years
2) Performance did go up and down (as would be expected), however, overall he’s been doing good.
3) Publics’ (dare I say, Moneyweb commenters’) attitudes changed with performance.

A conclusion can be drawn which is that the public (no matter how much they thing of themselves as investors) are worlds apart from professional investors. It’s no wonder that the public are known to chase performance and almost always lose.

The above statements apply equally well to Piet Viljoen.

Close to retirement (say 5 to 7 years) the very last thing you want is to be in Biccard or Piet funds.

Awesome banter. Can be compared to watching the Boks lose and listening to the 70 000 crowd giving advice to the coach. Like most things, they both have a place. Exuberant fees are not justified regardless of good or bad performance, but the great citizens of SA always tend to voice themselves at the latter. Diversify folks, like “pap & vleis”, brandy & coke”!

I can take away one learned thing from this article. It reinforces the general understanding to stay far away from these fund managers.

Most of you say Index Funds.
Which ones?

SA with it’s woeful economic and political future? US with interest rates rising, huge debt and high stock prices? Europe? What sector what country?

To me it’s not so simple to pick the right one!especially now after a 7 year strong bull run.

The same with actively managed funds, which ones? Also not so simple.

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