Can Value Investing Make a Comeback?

MICUK 2020: It's been the worst decade on record for value investing, says Jupiter's Ben Whitmore. Can the once popular style make a comeback? 

Holly Black 17 November, 2020 | 10:03AM
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Holly Black: Welcome to the Morningstar Digital Investment Conference. I'm Holly Black. With me is Ben Whitmore. He is from Jupiter Asset Management. Hello.

Ben Whitmore: Hello, Holly.

Black: Ben, you are a value investor. So, I should probably ask the question, what's it like to be a value investor in 2020?

Whitmore: Well, it's been very, very difficult for value investors and their clients in 2020. There aren't many people around who have witnessed this before because we've had the worst five-year relative period for value investing, which has just exceeded the five years to 1932. So, there aren't many people who can say they've got any experience of dealing with this for obvious reasons. But what I do passionately believe in is that all the evidence over at least 100-plus years shows that if you consistently buy things on low valuations, you do have a good chance to make good returns subsequently for your clients. But it is very fair to say that there are some big question marks around value investing as a style of investing and whether it can still work.

And I'm addressing those in the presentation I'm doing. And those big issues are around disruption, the technology giants and interest rates staying low forever. And I do think that although some of those issues pose a bit of a headwind to value investing, I do really believe that there is no real evidence that says it's permanently broken. And what I try and do in the presentation is that clearly any value investor is probably going to defend value investing, but I do try hard to be as objective as possible and look at some of the pitfalls in value investing. But I do think in aggregate time will judge it and clearly, the evidence shows that value investing can do well over time. There are always bumps in the road, but I do think it is proven to be a good style of investing for clients.

Black: A lot of people do say value investing is dead in this momentum era. What do you think the catalyst would need to be to see a change?

Whitmore: Yeah, it's something that's – that catalyst is clearly front of mind for a lot of people and no one really knows, no one can really predict it. I think the best explanation I've had for any potential catalyst is there needs to just be a change in the narrative in stock markets. So, some form of change around either the growth outlook, the interest rate outlook, but something different needs to happen. The same environment of evermore QE, evermore pumping central bank money into the system, I don't think that will change it. I think we need a change in the current narrative, something different to happen.

Black: And a lot of people, when they're looking at value investing, get very worried about falling into a value trap. What are your tips for avoiding that?

Whitmore: So, the first thing is, you do have a portfolio. You will pick up some businesses which don't recover how you expect and are not as successful. That is a given. But in general, what we believe protects you is really concentrating on two big things – the balance sheet, making sure that's underpinned for the equity shareholder, and secondly, really digging into the franchise, what is the business you're actually buying and investing into, can you see how it has a very clear path over the next 5, 10, 15 years to helping its customers to earn profits and the work on both the balance sheet and the franchise, what is the business you're buying – I personally think are the two main characteristics that help you either to a degree prevent a value trap, or if you have one, limit its damage to the portfolio.

Black: Ben, thank you so much for your time. For Morningstar, I'm Holly Black.

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Holly Black  is Senior Editor, Morningstar.co.uk