Industry Updates

The Road to Beyond Beta Europe Digital: When will value make a comeback?

Record-wide dispersion against growth

George Geddes


The first edition of ETF Stream’s two-part webinar series, The Road to Beyond Beta Europe Digital, explored value’s underperformance in recent years and what has been the drivers for this low period.

When discussing this underperformance, Vitali Kalesnik, head of research, Europe, at Research Affiliates, pointed to the near 50% drop in value between December 2006 and June 2020.

“This is one of the deepest and long-lasting drawdowns, however, this is not the first time value has seen negative periods,” Kalesnik added.

Events such as the Global Financial Crisis, the Biotech bubble and particularly the Tech bubble in the 1990s all had negative implications on the performance of value.

Moving away from the performance of value from a US equity perspective, Nicolas Rabener, founder and CEO of FactorResearch, analysed the performance of the factor across other asset classes.

Commodities, currencies and fixed income have also not performed very well in addition to the underperformance of value for equities.

A common question asked given value’s underperformance over the last decade is whether now is the time to invest.

Looking at the margin between price-to-book valuations and earnings before interest, taxes, depreciation and amortisation (EBITDA), the difference between cheap and expensive stocks is at the most extreme value seen over the last 30 years, according to Rabener.

This includes the period of the Tech bubble which was the second worst performing periods for value seen in recent years.

“From this, there is the argument that value is cheap, however, this does not necessarily mean it is a good entry point,” Rabener continued. “From a fundamental perspective, yes you could be buying in cheap as it is trading at a discount.”

An issue Kalesnik raised regarding the price-to-book metric is how it does not take into consideration intangibles.

“The way book value is defined, many investments into intangibles are traded as expenses,” Kalesnik said. “For example, if you were to start a company and we were to hire a number of researchers and software developers, all the investment spent on developing research papers and software, the intangibles, would be treated as expenses and would be eating into our book value.”

In addition to technology stocks and significantly low interest rates implemented by central banks as part of quantitative easing, one contributing factor highlighted by both panellists for value’s underperformance is the growing popularity for environmental, social and governance (ESG) strategies among investors.

Kalesnik commented: “The growing drive towards cleaner energy is approximating older industries to hold onto stranded assets.”

ETF Insight: Is the value factor dead?

Furthermore, Rabener added that investors will tend to have to choose either value stocks or highly rated ESG stocks as the two rarely coincide.

“While there are some value stocks that are rated highly in ESG and are cheap, for most value investors in search of ESG, there is usually a bit of conflict,” Rabener continued.

“Value companies can often be companies that are in trouble and they have problems other than trying to be good corporate citizens so will put more focus onto resolving these problems rather than trying to score highly in ESG.”

In the build-up to Beyond Beta Europe Digital event on 23-24 September, ETF Stream is hosting two webinars which will explore important areas from the factor investing and ESG landscape.

The second part of The Road To Beyond Beta Europe Digital is taking place on 10 September and will focus on ESG ETF innovation.

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