Poor Joe Duffy. After the latest broadcast of the hit college love story, ‘Normal People’, the RTE Liveline radio host was moved to tweet, “I’m phoning in sick”. The TV flesh-fest was guaranteed to trigger an avalanche of outraged radio phone-ins from the 1970’s (or the 1700s) and one could only giggle at Joe’s quip. He could afford to have a laugh. After all, this was just a 6 week TV series. Not so elsewhere in a long-suffering corner of the investment world.
Spare a thought for portfolio managers who pursue a value investing style. The value style has had many famous disciples, including Warren Buffett, but it has had a miserable decade of performance compared to the overall market. The faith of long-frustrated clients is being sorely tested and more than a few portfolio managers have confessed to this writer a Joe Duffy-fear of the telephone switchboard. However, the contrarian in all value investors was possibly tweaked in recent days by an article in the FT.
The piece by the excellent Robin Wigglesworth, “Does value investing still make sense?”, struck a chord with those who have over the years watched the likes of Barron’s, Goldman Sachs and The Wall Street Journal mark an ironic trend reversal within weeks of publishing a headline grabbing pronouncement of a new paradigm in the financial world. When one views the chart in the FT article chronicling a decade of laggardism it probably is worth asking whether value is relevant in an increasingly digital world, with or without pandemics. See for yourself…
The numbers don’t lie. Since 2010 the Value index above has delivered 80% returns. The snazzier Growth index powered by technology has returned 240%. To refresh memories, value investing attempts to invest in stocks trading at low prices relative to the value of a company’s assets and the cash flows it generates through the business cycle. Many value evangelists hoped a bear market would hammer tech and highlight the quaint attractions of boring old cheap companies. Hold that beer, or Corona.
The global pandemic has brought no such relief for Value. The CV19 sell off has not been kind to this approach with another leg down in relative performance. The following headlines give a good clue as to where the damage is being inflicted:
‘€2.4bn wiped off value of State’s shareholding in two main banks’ – Irish Times, March 16th 2020
‘Historic loss in oil prices sends US stocks reeling’ – Washington Post , April 20th 2020
‘FTSE 100 groups cut £24bn of dividends’ – Financial Times, 9th May 2020
My old boss, Terry Smith, is not particularly surprised as his eponymous investment vehicle coasts towards £20 billion of funds under management:
“Shares in companies that are lowly rated are so mostly for good reasons. Because their businesses are heavily cyclical, highly leveraged, they have poor returns on capital and/or they face other structural or management issues. It doesn’t sound like a combination likely to protect the business and your investment in difficult times, and so it has proven thus far.”
I have always felt safer on lots of levels when I agree with Terry. In this instance, I agree the CV19 pandemic was never going to be a good launch pad for value outperformance given the sectors impacted. I also have written multiple cautionary pieces on the perils of depending on “Other People’s Money”. However, CV19 is not your classic business cycle slowdown. There are possibly some superb businesses which have now entered value territory and deserve some oppotunistic scrutiny.
In one of my occasional “counselling” sessions with a traumatised portfolio manager this week he highlighted a dividend growth fund which is currently trading on multiples of earnings below 10x. The dividend yields are likely to be in the 4-5% region and it did prompt some exploratory thoughts for the post CV19 era. I thought of home champions and I thought of travel. Three very strong franchises came to mind.
First, I thought about restoration of international flights and Ryanair valued at just over €8 billion. This monster “flying Spar” was on its way to an annual passenger count of 150 million souls. Given its recent pre-CV19 valuation of just over €16 billion there’s a reasonable symmetry between passengers and valuation. And this did leave me wondering whether more than 50 million passengers would never return to the skies.
Second, if you like the idea of captive travellers in “flying Spars” and extortionate retail margins, look no further than WH Smith. The WH Smith share price has fallen by two thirds and this 200 year old franchise is valued at just over £1 billion. More than 60% of its revenues are travel related and you do wonder again.
My final thought is very much an “Other People’s Money” candidate. Ardagh Group has been a stunning growth story born out of a Dublin glass bottle factory and lots of junk debt financing. Given the owner/architect, Paul Coulson, has seen most macro challenges off over the years and the Ardagh business is focused on packaging food and beverages, one senses a halving of the equity value of the business since March might be only a temporary visit to the value saloon.
So, perhaps we need to think about Value as part of the economic recovery period. As a serial advocate of diversification, I think a portfolio should always contain an allocation to the value style. I recall my former colleagues at the quants research unit, Quest, seeing value presenting positive signals in November 2008. The market took off a few months later, in March 2009. Guess which quants team were making similar sounds on value in the past week?
And a final final thought…. Value investing will always have its leader sectors. The past might have featured oil, banking and retail leaders. A global pandemic might just have accelerated the future. And, this writer’s sense is that, like monarchies, we are going through a succession period. There are new leaders and curiosity could be richly rewarded.