Rotation into Value

[vand]

..... Being oriented to "value" shares, whatever they are, it should decline less come any bust allowing a modestly profitable rotation into growth stocks......

But is this even true? From the article you linked: ".....It is worth noting that the 2021 Credit Suisse Global Investment Returns Year Book records that from the peak of the dotcom boom in 2000 to March 2003 US stocks fell 45 per cent, UK equity prices halved and German stocks fell by two-thirds......"

The FTSE was hardly a value play during the dotcom bubble and its CAPE value was touching around 30 in 1999. But, in fact, it did do better than the US market (where CAPE peaked at over 40) over most of the following 10 years.. and it outperformed the Nasdaq by a massive amount. Today the FTSE's CAPE is around 16, whereas the S&P's is currently almost back to the its dotcom peak. It is only since the bull market in tech got going after the GFC that the US has been rerated so highly.

People will say that the US has higher growth which justifies a higher rating.. and I have some sympathy for this view. However, it's also hard to argue that bog standard US companies that have no superiority to their non-US counterparts haven't also been swept up in the euphoria.

None of this means that the spread has to narrow back nearer to its historical premium... but it would be extraordinary if it didn't. I guess only time will tell.

[TahiPanasDua]

..... Being oriented to "value" shares, whatever they are, it should decline less come any bust allowing a modestly profitable rotation into growth stocks......

Perhaps Growth versus Value isn't the most helpful distinction, given the above. Cyclical versus non-cyclical or cyclical versus defensive might be a better indicator of which sectors do well in a crisis.

This was exactly my experience. I was heavily biased to non-cyclical defensive stocks before the last 2 big busts and that resulted in significantly less falls. I still have most of those. It brings us back to what we mean by "value".

TP2.

[TahiPanasDua]

Can anyone think of an IT, ETF or fund that approximates more to a non-cyclical defensive investment than VHYL?

Thanks in advance.

TP2

[simoan]

Can anyone think of an IT, ETF or fund that approximates more to a non-cyclical defensive investment than VHYL?

Thanks in advance.

TP2

First one that comes to mind is Finsbury Growth & Income. Last time I looked it was at a small discount.Also maybe Troy Income & Growth.

All the best, Si

[Wuffle]

TP2s mention of VHYL prompted me to plot it against VWRL - and SMT for spice - on HL fund comparator thingy. The total return one.
I think we can guess the longer term outcomes but over 12 months the first 2 are neck and neck and the latter has eventually had it's 'wile e coyote' moment and is some way off.
I think I learned something.

W.

[mc2fool]

Can anyone think of an IT, ETF or fund that approximates more to a non-cyclical defensive investment than VHYL?

Thanks in advance.

TP2

Maybe ...

MVOL/MINV ($/£) iShares Edge MSCI World Minimum Volatility UCITS ETF https://www.ishares.com/uk/individual/en/products/251382/ and/or
IWVL/IWFV ($/£) iShares Edge MSCI World Value Factor UCITS ETF https://www.ishares.com/uk/individual/en/products/270048/ ?

iShares have US/Europe/EM regional versions of both too. Other ETFs providers are available.

[simoan]

..... Being oriented to "value" shares, whatever they are, it should decline less come any bust allowing a modestly profitable rotation into growth stocks......

But is this even true? From the article you linked: ".....It is worth noting that the 2021 Credit Suisse Global Investment Returns Year Book records that from the peak of the dotcom boom in 2000 to March 2003 US stocks fell 45 per cent, UK equity prices halved and German stocks fell by two-thirds......"

The FTSE was hardly a value play during the dotcom bubble and its CAPE value was touching around 30 in 1999. But, in fact, it did do better than the US market (where CAPE peaked at over 40) over most of the following 10 years.. and it outperformed the Nasdaq by a massive amount. Today the FTSE's CAPE is around 16, whereas the S&P's is currently almost back to the its dotcom peak. It is only since the bull market in tech got going after the GFC that the US has been rerated so highly.

People will say that the US has higher growth which justifies a higher rating.. and I have some sympathy for this view. However, it's also hard to argue that bog standard US companies that have no superiority to their non-US counterparts haven't also been swept up in the euphoria.

None of this means that the spread has to narrow back nearer to its historical premium... but it would be extraordinary if it didn't. I guess only time will tell.

I see this is all generic stuff and I wrongly joined in the conversation, for which I apologise. I have no interest in the valuation of markets, I'm only interested in the future prospects and profitability of the companies I hold. We have the January reporting season about to start in the US and it would not surprise me if this "Rotation to Value" was quickly reversed. If you expect an inflationary environment, regardless of what interest rates do, quality compounders with high margins and pricing power are what I want to be holding. I won't be selling my Apple, Microsoft, PepsiCo or Qualcomm to buy banking and oil shares, no matter what.

All the best, Si

[hiriskpaul]

For those that appear not to know, a "Value" share is not one that you simple consider a good investment at the current price. "Value" shares have long been defined as shares trading at cheap prices, where cheapness is defined according to some measure of intrinsic value, eg using metrics such as price/book value.

I have never liked phrases such as "Rotation into Value". The implication of junky articles I have read that use that type of language is of investors selling out of Growth shares and buying Value instead. But that makes no sense as all shares are owned by someone. It is impossible for investors to sell out of a share unless someone else is willing to buy it. Investors in aggregate, cannot sell out of one subset of shares to buy a different subset.

There can of course be a kind of Rotation into Value without any share trades at all. If you hold a portfolio of shares which you divided into sub-portfolios of Value and Growth, the value of the Growth portfolio can fall relative to that of the Value portfolio. That can mean you Rotated into Value even if you haven’t traded. Extend that to the market as a whole and Rotation into Value can start to make sense. It just means the Value shares have outperformed non-Value. In essence, if there is a desire by investors as a whole to allocate more of their money to Value shares, that is achieved by the re-pricing of those Value shares.

[Hariseldon58]

..... Being oriented to "value" shares, whatever they are, it should decline less come any bust allowing a modestly profitable rotation into growth stocks......

I see this is all generic stuff and I wrongly joined in the conversation, for which I apologise. I have no interest in the valuation of markets, I'm only interested in the future prospects and profitability of the companies I hold.

All the best, Si

I was interested in your lack of interest in the valuation of markets and your wish to concentrate on the prospects to and profitability of your holdings but they are inextricably linked.

Companies( largely) exist in ignorance of their valuation on the stock markets, they do what they do and make profits ideally!. Your prospects as
an investor in that company very much depend on how others view the valuation of that company and inevitably the broader valuation of markets comes into the valuation of your holdings.

If the market do not appreciate the positive features of your holdings, they will be valued accordingly and potentially become cheap, if markets become bullish on the prospects of your holdings then they become expensive. Your holdings march on in ignorance on all of this, your ultimate returns will be as a result of income generated by your holdings and the market view of the valuation of your holdings.

[hiriskpaul]

Currently, I'm thinking of buying something like VHYL as an interim measure. It will provide a dividend while waiting.

With respect, statements like that (and they are not uncommon) don't make a great deal of sense. The dividend per share you get from VHYL will be met with a corresponding drop in price per share. The same thing would happen if you invested in VWRL instead, but the dividend/drop in share price is larger with VHYL. I can sort of see where this funny logic comes from, as for some investments the price does not drop when payments are made. if you bought a high yield (aka "junk") bond, hoping for a bounce in price from the recovery of the issuer, then the price does not drop with each coupon payment. Equities however, don't work that way.

Being oriented to "value" shares, whatever they are, it should decline less come any bust allowing a modestly profitable rotation into growth stocks. I just can't get interested in the Ruffers, and Capital Gearings of this world. It's a personality thing.

That part does make sense if you believe that value shares "should" decline less in a bust. I am unconvinced of it as a general strategy, but it might work if we get a crash fairly soon as value shares are quite low compared to the market despite the relatively recent "Rotation".

[simoan]

I think it's at times like this that you need to consider the effect of compounding and why this idea of selling quality growth companies is absurd (assuming your investment timescale is longer than the length of your nose). When I first bought my MSFT holding in 2004 US interest rates were 1%. It was acquired at an average price of $27. FY2004 diluted earnings was 76 cents, so it was roughly on a PER of 36. The same as today! And yet the share price is currently $306. I have several other examples. I don't need to tell you what the share price was for "Value" shares because something bad happened in 2008. In particular, the book value of banks turned out to be a complete and utter illusion.

All the best, Si

[vand]

Of course everyone will have their own definition of what is meant by "value".

Cathie Wood claims her fund's holdings are now "deep value" - she probably says this to stir up interest, but no one else will agree that any of her holdings are value shares.

If we look at what the MSCI World Value/Total/Growth indexes you have these numbers:

Value	World	Growth
PE	16.34	22.74	37.29
FPE	14.15	19.46	31.15
PB	2.16    3.39    7.83
Div	2.67%	1.66%	0.65%
			
			
Earnings Growth	15.5%	16.9%	19.7%

[simoan]

I was interested in your lack of interest in the valuation of markets and your wish to concentrate on the prospects to and profitability of your holdings but they are inextricably linked.

Companies( largely) exist in ignorance of their valuation on the stock markets, they do what they do and make profits ideally!. Your prospects as an investor in that company very much depend on how others view the valuation of that company and inevitably the broader valuation of markets comes into the valuation of your holdings.

If the market do not appreciate the positive features of your holdings, they will be valued know the future. accordingly and potentially become cheap, if markets become bullish on the prospects of your holdings then they become expensive. Your holdings march on in ignorance on all of this, your ultimate returns will be as a result of income generated by your holdings and the market view of the valuation of your holdings.

Firstly, I am a long-term investor. My preferred holding period is forever. I can't control what markets do, but I can control what types of companies I hold through my valuation and investment process. We are all investing in the knowledge that we do not know what the future holds and I don't find taking notice of short-term market noise helpful. Frankly, the market knows no more than I do about the future. That's the only point I am trying to make. I am not saying that the price of my holdings will not move in time with the voting machine, it's only the longer term weighing machine that interests me.

Howard Marks wrote a very good newsletter about "Growth vs Value" a few months back if you are interested. I concur with it completely. Here you go: https://www.oaktreecapital.com/docs/def ... -value.pdf

All the best, Si

[Newroad]

Hi HiRiskPaul.

Interestingly, I can't find your first quote of TahiPanasDua above, but that could just be me being dopey.

On the substantive point relating to it though, I think it's likely to have been a relative one, that is, it would be taking a view that the equities held by VHYL are likely to rise more/fall less than VWRL or similar. I think the bit about the "dividend while waiting" would likely have been a minor/side point.

Regards, Newroad

[hiriskpaul]

Hi HiRiskPaul.

Interestingly, I can't find your first quote of TahiPanasDua above, but that could just be me being dopey.

On the substantive point relating to it though, I think it's likely to have been a relative one, that is, it would be taking a view that the equities held by VHYL are likely to rise more/fall less than VWRL or similar. I think the bit about the "dividend while waiting" would likely have been a minor/side point.

Regards, Newroad

Sure, no offence intended, but I see this fuzzy logic regularly rolled out without challange, so I thought I might challenge!

[hiriskpaul]

I think it's at times like this that you need to consider the effect of compounding and why this idea of selling quality growth companies is absurd (assuming your investment timescale is longer than the length of your nose). When I first bought my MSFT holding in 2004 US interest rates were 1%. It was acquired at an average price of $27. FY2004 diluted earnings was 76 cents, so it was roughly on a PER of 36. The same as today! And yet the share price is currently $306. I have several other examples. I don't need to tell you what the share price was for "Value" shares because something bad happened in 2008. In particular, the book value of banks turned out to be a complete and utter illusion.

All the best, Si

Cherry picking or what!

[BT63]

Historically, if an investor wanted a 90%+ probability of a positive five-year return from the S&P 500, they needed to buy when the P/E was 17 or less, and the median annualised return turned out to be around 10%, with a range of around -1% to +20% annualised.

From current valuations it would historically have been about 50/50 whether investors made a positive five-year return, with the median being around zero and a range of around -5% to +5% annualised.

The above suggests that valuations and value matters. Expensive stuff tends to get cheaper (high P/E correlates with lower future returns) and cheap stuff tends to get more expensive (low P/E correlates with higher future returns). The correlation between starting valuation and future returns is something like -0.4 to -0.5.

But, of course, people say it's different this time because the Fed now makes sure markets don't decline too much and makes sure that there is no alternative asset class for anyone looking for investment returns.

[simoan]

I think it's at times like this that you need to consider the effect of compounding and why this idea of selling quality growth companies is absurd (assuming your investment timescale is longer than the length of your nose). When I first bought my MSFT holding in 2004 US interest rates were 1%. It was acquired at an average price of $27. FY2004 diluted earnings was 76 cents, so it was roughly on a PER of 36. The same as today! And yet the share price is currently $306. I have several other examples. I don't need to tell you what the share price was for "Value" shares because something bad happened in 2008. In particular, the book value of banks turned out to be a complete and utter illusion.

All the best, Si

Cherry picking or what!

Well, yes, but it's not even my best performing compounder. I have several others. What about Apple at $15.50 in March 2013? Games Workshop? Diploma? All now on roughly the same rating as when I first bought them despite multi-bagging. All the worst investing mistakes I have made is by selling long term compounders too early based on some strange idea of them being overvalued. Some companies always look overvalued and they are often the best ones to hold for the longer term as they keep on compounding.

All the best, Si

[Hariseldon58]

I was interested in your lack of interest in the valuation of markets and your wish to concentrate on the prospects to and profitability of your holdings but they are inextricably linked.

Companies( largely) exist in ignorance of their valuation on the stock markets, they do what they do and make profits ideally!. Your prospects as an investor in that company very much depend on how others view the valuation of that company and inevitably the broader valuation of markets comes into the valuation of your holdings.

If the market do not appreciate the positive features of your holdings, they will be valued know the future. accordingly and potentially become cheap, if markets become bullish on the prospects of your holdings then they become expensive. Your holdings march on in ignorance on all of this, your ultimate returns will be as a result of income generated by your holdings and the market view of the valuation of your holdings.

Firstly, I am a long-term investor. My preferred holding period is forever. I can't control what markets do, but I can control what types of companies I hold through my valuation and investment process. We are all investing in the knowledge that we do not know what the future holds and I don't find taking notice of short-term market noise helpful. Frankly, the market knows no more than I do about the future. That's the only point I am trying to make. I am not saying that the price of my holdings will not move in time with the voting machine, it's only the longer term weighing machine that interests me.

Howard Marks wrote a very good newsletter about "Growth vs Value" a few months back if you are interested. I concur with it completely. Here you go: https://www.oaktreecapital.com/docs/def ... -value.pdf

All the best, Si

The market valuation may differ from your own valuation and that provides opportunities.

I understand your point of view but the market valuation provides you a choice when it differs significantly from yours.

[simoan]

I was interested in your lack of interest in the valuation of markets and your wish to concentrate on the prospects to and profitability of your holdings but they are inextricably linked.

Companies( largely) exist in ignorance of their valuation on the stock markets, they do what they do and make profits ideally!. Your prospects as an investor in that company very much depend on how others view the valuation of that company and inevitably the broader valuation of markets comes into the valuation of your holdings.

If the market do not appreciate the positive features of your holdings, they will be valued know the future. accordingly and potentially become cheap, if markets become bullish on the prospects of your holdings then they become expensive. Your holdings march on in ignorance on all of this, your ultimate returns will be as a result of income generated by your holdings and the market view of the valuation of your holdings.

Firstly, I am a long-term investor. My preferred holding period is forever. I can't control what markets do, but I can control what types of companies I hold through my valuation and investment process. We are all investing in the knowledge that we do not know what the future holds and I don't find taking notice of short-term market noise helpful. Frankly, the market knows no more than I do about the future. That's the only point I am trying to make. I am not saying that the price of my holdings will not move in time with the voting machine, it's only the longer term weighing machine that interests me.

Howard Marks wrote a very good newsletter about "Growth vs Value" a few months back if you are interested. I concur with it completely. Here you go: https://www.oaktreecapital.com/docs/def ... -value.pdf

All the best, Si

The market valuation may differ from your own valuation and that provides opportunities.

I understand your point of view but the market valuation provides you a choice when it differs significantly from yours.

Well, obviously. That's what investing in shares is about, isn't it? Having your own valuation model in order to find situations where the market price is less than the price you are prepared to buy at, and selling when the opposite is true.

All the best, Si