FYI | Aug 18 2009
By Chris Shaw
There are many investment styles but not all generate consistent performance, one exception being a value based investment approach. Russell Investments points out in a research paper, “Value Tilts for Australian Equity Portfolios”, operating a value investing style should generate higher returns as the focus is on buying stocks when they are perceived to be trading for less than fundamental value.
The group’s research bears this out as it notes in the period of 1994 to March of 2009 a value investing approach on the Australian market compared to a neutral style benchmark investing approach generated an excess return averaging 1.4% per annum over that time.
Such performance is not necessarily consistent however, as Russel Investments portfolio manager Kathy Cave points out a value style approach can see a portfolio underperform during a value down period. As an example she notes during a three-year cycle value stocks on average underperform the broader market 30% of the time.
The maximum underperformance in such a cycle is around the 4% mark on Russell Investments’s numbers, but its analysis also shows value portfolios tend to be less volatile than some other types of portfolios across the cycle. The key according to Cave is value style investing is a long-term phenomenon, so short or medium-term periods of underperformance are possible.
The other point Cave makes about such an approach is there is little point in trying to time a value investing style as research has shown this is very dificult to achieve successfully. Rather, and this is the approach used by Russell Investments, the better style is to adjust the extent of the bias towards a value style of investment in accordance to market conditions.
This is important as Cave points out even under a value style investing approach around 65% of any excess return comes from stock selection and only around 2% of any excess return is from the portfolio’s bias to the value investing style.
(See also today’s column by PFP Wealth’s Tim price “Hitting It Out At The Park“)
