The value investing, measured by the Russell 1000 Value, has experienced a long stretch of low profitability in relation to the Russell 1000 Growth index. In the long term, however, the value has obtained better results.
- The Russell 1000 Value index represents only one value approach
- Benjamin Graham referred to the “margin of safety” offered by an action when it has its price is not exaggerated
- Value and growth have had a long cyclical relationship of relative performance
These are for Edward J. Perkin, Director of Capital Investment and leader of the ‘value’ team at Eaton Vance Management, the four lessons we can draw from the distinctions between growth and value:
- The Russell 1000 Value index represents only one approach to the value: the P / B has lost its appeal during this cycle, and it remains to be seen if it will recover. However, it is true that after eight decades as the indicative basis of value, it is too early not to notice it at least a little.
- The Russell 1000 Value index can not evaluate the risk: Benjamin Graham referred to the “margin of safety” offered by an action when it has its price is not exaggerated. This margin of safety had two purposes: reducing the risk of the investment and increasing the potential yield once the valuation returned to its perceived level as adequate. As the companies that are part of the Russell 1000 Value accumulate more debt than in the past, investors can not have the same confidence about the existence of a margin of safety.
- It is better to discover what actions are valued with active management: Active managers are free to refine their value approach: which is the most appropriate for each sector and each action at a given moment of the economic cycle. This could mean fixing the P / B, P / E or the price-to-free-cash-flow ratio. They can determine if the safety margin is sufficient and evaluate the potential impact of risk factors such as leverage or volatility.
- The commercial cycle has not ended: Value and growth have had a long cyclical relationship of relative performance. The longest and most recent part of growth profitability has been driven by the momentum and profitability of large-cap technology stocks. Predicting when the cycle will return to favor the value again is complicated, but it is also predicting that it will not happen again. The story finally repeats itself, and usually with good reasons.