Will Value Investing Make a Comeback?

Morningstar's Fatima Khizou talks to Boston Partners' David Pyle about US equity strategies after a long winning streak for growth stocks

Fatima Khizou 7 May, 2019 | 3:21PM
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Fatima Khizou: Hello and welcome to the Morningstar Investment Conference in London. I'm Fatima Khizou and I'm joined today by David Pyle from Boston Partners to talk about US Equities.

Hello, David.

David Pyle: Good morning.

Khizou: The US stock market has led the way for a number of years driven by growth stocks. Where do you think we are now in the cycle and are we likely to see a change of leadership from gross to value?

Pyle: Well, it's always hard to tell what's going to happen in the future. But we certainly have been led by growth stocks lately. As we look at the market, we're seeing increasing evidence that the odds are stacking in our favour in terms of being a value investor. There are many different ways to look at it but in terms of looking at the valuation of growth stocks versus value stocks –looking at the spreads between those, it looks to us like you're getting paid to move into value. The timing is always difficult, but it does look like the odds are starting to stack in our favour.

Khizou: Could you perhaps talk us through few of the reasons behind this optimistic view?

Pyle: Sure. The main thing is just looking at the valuation of growth stocks which is getting to be at a very high level relative to history. If you look back at the valuation of growth stocks over the last 20 to 30 years, they are at one of their higher levels. So, the only time they've been higher was during the Internet bubble back in 1999. If you also look at interest rates and what interest rates are doing, any kind of rise or even an inversion in the yield curve that usually favours value stocks, and that's the position that we're starting to find ourselves in today.

Khizou: Financial is a big sector for value managers including Boston Partners. How do you approach the sector given the change in some of the Fed interest rates policy?

Pyle: Remember that financials are made up really of two sectors; banks and insurance companies, and so you need to think about them separately. We're quite favourable on the insurance stocks mainly because we see pricing starting to increase for them. In terms of the banks, you're quite correct that the recent changes in the Fed policy have put some pressure on net interest margins of banks. However, if you look at credit and credit is the most important thing to any bank because interest rates can be annoying in terms of earnings, but credit is what kills the bank; credit is very, very good today. If you look at the valuations of banks, we think they're very good, but most importantly we're seeing very good capital return from the banks in terms of share buybacks and dividends. Most of the banks are returning nearly 100% of their capital to shareholders and this return of capital is something that usually drives very good stock performance. So we're still quite favourable on the banks, even though they are seeing some pressure on their net interest margins today.

Khizou: And outside of financials, so where do you see opportunity in term of value currently?

Pyle: Well, most recently we're seeing a lot of opportunities, although it's tricky we're seeing a lot of opportunities in healthcare. With the most recent talk about changing the healthcare reimbursement environment in the United States, maybe going from a private system to a public system that's put a lot of pressure on the stocks. We see that any massive change in the reimbursement mechanism within the United States is probably unlikely and if we're correct in that assessment these stocks were very inexpensive to us and look like very good opportunities today.

Khizou: Thank you very much, David.

Pyle: Thank you.

Khizou: This is Fatima for Morningstar. Thank you for watching.

This article is part of Morningstar's special report on What the Experts Say

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Fatima Khizou  is an Investment Research Analyst for Morningstar

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