Whatever happened to value investing?

Warren Buffett, chairman and chief executive officer of Berkshire Hathaway. Picture: Bloomberg

The sharemarket’s violent swings this year have cast a harsh light on managed funds, raising serious questions about “investing styles”, especially the notion of value investing.

Value investors, we are told, aim for intrinsic value, which ignores trends and concentrates solely on financial numbers from the bottom up.

We might reasonably expect value funds to be offering consolation this year, but value investment actually underperformed the wider market by almost 3 per cent as it plunged by more than 30 per cent in the very depths of the recent crash.

Worst still, the world’s most famous value investor, Warren Buffett of Berkshire Hathaway, is enduring one his worst years on record after a disastrous foray into the airline sector. Berkshire Hathaway has now underperformed the S&P 500 index for a decade.

Nearer to home, leading names were scattered across the (non-geared) worst performers in a recent Morningstar survey: the large value fund category included Nikko, Dimensional and Perennial and showed returns for the quarter that were down by about 30 per cent (while the broader ASX 200 fell by 23.1 per cent in the three months to March 31).

The overall performance of value managers suggests once again that there is actually no investment style that is an enduring winner.

As for value investing, one theory is that while the market chased growth, value investors have clearly underestimated how long interest rates were going to stay low (in turn this meant their intrinsic value estimations on many stocks were wrong for an extended period).

Brad Potter, head of Australian equities at Nikko, has been prompted this week to write to clients asking the obvious question: “Is it over for value investing?”

His answer, of course, is no. It’s not ... you’ve just got to be patient for just a little while longer.

Potter is quick to point out that even though official figures are not out yet, for the month of April his fund has already started to see a rebound beating the 8.8 per cent jump recorded by the ASX 200 in the month of April.

But Potter’s key point is that value investors win big not when the markets are flying, or indeed when they crash - but in the early stages of a recovery.

As Potter told clients: “The value drawdown that started at the beginning of 2017 is one of the worst investors have witnessed: low PE stocks are trading 12 per cent below long-term averages but high PE stocks are trading 36 per cent above.

“The forward price earnings of growth is extremely elevated on both an absolute basis and relative to value.”

To be fair, the value brigade did shine - and shine brightly - in the years rather than weeks after the global financial crisis.

In theory, the best companies with the best balance sheets should come through in a recovery - value investors with their portfolios loaded up on the likes of the big four banks, QBE, Lendlease and Oil Search might well be about to get it right.

They have certainly been wrong for long enough.

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Wealth editor James Kirby will present Your Portfolio, a series of Facebook live Q&A sessions each Wednesday evening at 7.30pm starting May 13.