Rudi’s View: Traditional Value Is A Flawed Narrative

Rudi's View | Jun 26 2024

By Rudi Filapek-Vandyck, Editor

We don't need to read Yuval Noah Harari's 'Sapiens' to understand how people unite behind narratives.

It happens in financial markets all the time.

Not that popular narratives are also required to be accurate or able to withstand the test of time. The US has been on the verge of going bankrupt for multiple decades now, and the end of the US dollar as the world's reserve currency has been "imminent" for all this time.

Another popular prediction sees a replay of the stagflation 1970s, with bond yields reverting back into the double-digit percentages as the price of crude oil jumps to US$200/bbl and those mean-spirited central bankers can no longer contain inflation.

Not all narratives are equally flawed. If they were, we'd probably be no longer treating them as gospel, though maybe I am now putting too much faith in the intelligence of my peers and contemporaries. Certainly, social media has been a genuine eye-opener.

The most dominant narrative in the world of investing is that, in order to achieve the best return in the long run, we must buy assets at a discount. Buy something that's worth a dollar for less, preferably a lot less, so the adage goes, and you cannot go wrong.

It's what a smart investor does, as opposed to those who simply chase market momentum.

So ingrained is this narrative in the share market's psyche that many will never, ever question it. It's like religion. You believe. You don't doubt. It's simply the way it is.

The problem is, however, a 'cheap' valuation is not the same as a low PE. Never has been. Even more important: sometimes the world changes so dramatically, it makes a mockery out of old ways and habits that used to work well during the Halcion days.

The past ten years have been such a time. One need not look any further than the latest marketing campaign by investors in 'growth' stories at Hyperion, part of the Pinnacle Investment Management Group ((PNI)), which is proudly showing off the 17.1% per annum average return from the Hyperion Global Growth Companies Fund since 2014.

Let's not beat around the bush, your average 'value' investor fails to beat the local index which has done a little better than half that return over the period (circa 9%). By anyone's measurement, that's a significant difference.

A quick glance over the individual stock performances for the decade past easily explains why buying cheap & undervalued stocks has failed to keep up: many of the familiar household names have significantly underperformed, including all the banks (ex-dividends), energy retailers, small industrials, and large swathes of the energy and metals sectors.

While many a local investor might argue total return for banks and other market segments has kept up with the index, broadly, when taking into account the large dividends and franking attached, the gap with those stocks that have performed over the period is nevertheless mindbogglingly large.

We are talking three-four times the average index return without taking into account any dividends on top. Those are merely broad averages; many 'Growth' stocks have done significantly better.

You all know the names too: Altium ((ALU)), Aristocrat Leisure ((ALL)), ARB Corp ((ARB)), Cochlear ((COH)), Fisher & Paykel Healthcare ((FPH)), Pro Medicus ((PME)), REA Group ((REA)), WiseTech Global ((WTC)), et cetera.

Even CSL ((CSL)) and ResMed ((RMD)), whose share prices have encountered more headwinds in recent years, have still outperformed the ASX200 accumulation index by a factor three and four respectively.

For good measure: the select list of significant outperformers also includes a number of commodities-related companies, including BlueScope Steel ((BSL)), Fortescue ((FMG)), Mineral Resources ((MIN)) and smaller peers like Chalice Mining ((CHN)), Evolution Mining ((EVN)) and Paladin Resources ((PDN)), but this segment always generates a few Heros among many more Zeros.

Making the observation is an eye-opener, for sure, but how will we respond to this?