The Value Investing Conundrum

Editor's Views: Value investing makes sense, but how long can investors be expected to wait for the style to stage a turnaround? 

Holly Black 18 September, 2020 | 10:54AM
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Being a value fund manager can’t have been an easy gig this year, or over the past decade in fact. At a time when all the big stories are tech and growth and large-cap, it’s hard to sell the “here are some hidden gems that everyone else hates” story.

One person who knows that all too well is Tom Dobell, who this week announced he would step down from the M&G Recovery fund after two decades at the helm. That must have been a bitter pill to swallow when he has not deviated from his mandate.

But value investing, people say, will make a comeback at some point. It’s inevitable, just a matter of time: all we need is the right catalyst, a change in sentiment, a mean reversion, whatever.

The trouble is that people have now been saying that for a decade. And in that decade we’ve had two new Prime Ministers, a new US President, a global recession and recovery, a Brexit referendum, a major trade war, a wave climate change protests, and a worldwide pandemic. Yet all the while the growth stocks keep growing. And, as our Morningstar Style Box shows only too clearly: value is still underperforming.

Seriously, what more of a catalyst do we need? Value as an investing style makes an awful lot of sense to me - certainly, more sense that putting money into start-ups that have been valued as unicorns despite have no discernible profits. But while I'm all for taking a long-term approach, asking investors to wait a decade for a turnaround might be testing the limits of their patience. 

Don't Forget Inflation

Investors are, for the most part, optimists, I think. It’s why they chase stocks up and why they panic when markets fall. And it’s why so many investors don’t build protection into their portfolio for when the going gets rough.

UK inflation came in at 0.2% in August. That is clearly not something to be worried about. Why is inflation a concern (when it’s higher)? Because it eats into the real value of your money. If inflation is at, say, 2% (the Bank of England’s target) your £100 stashed in the bank this year has the buying power of £98 next year. Over time the effects of that are huge – it’s basically reverse compound interest – and it’s a key reason why you should invest: so you can grow your money at a rate that outpaces these erosive effects.

But when inflation is meandering along at 0.2% it’s hard to feel too bothered, and certainly not bothered enough to do anything about it. But now is precisely the time to be building the defences into your investment portfolio that will kick in when the rate does pick up, because if you wait until after inflation is risen then, frankly, you’re too late. It’s like waiting until after it’s started raining to buy an umbrella.

Our resident expert, Jose Garcia Zarate, has put together this excellent explainer of why you should care about inflation and what you can do about it. Consider this a gentle nudge to maybe (to borrow an oft-use phrase) fix the roof while the sun’s still shining.

What Price Certainty?

It’s the little things that make you realise how far we still are from normal at the moment. This week my husband booked some theatre tickets for us for next May – way further in advance than I would usually commit to any event. And while I’ve written the date in my diary, I’m fully aware that we may never get to see the show. Or, if we do, we may be watching it at a safe social distance from the rest of the audience, unable to leave our seats and donning full PPE.

Uncomfortable face masks and my social life aside, the big concern here is what all that uncertainty means for the economy. Because if people think it's unlikely that the play, concert or sporting event they've booked will actually happen, they just won't book it. If they think their holiday destination will end up on the quarantine list, they won't arrange it. If they think Boris is going to cancel Christmas, then they won't go out and buy piles of presents. 

And if investors can't trust which way the stock market is going to swing next, they won't invest. 


The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Holly Black  is Senior Editor,


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