Redefining “value” for a modern economy

Value stocks are cheap and growth stocks are expensive. End of story, right? Our Fundamental Factor Team argues that the traditional tools for measuring value are out of date and offers a more nuanced view.

Views expressed are those of the author and are subject to change. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. 

IN MARKETS AROUND THE WORLD, value stocks have underperformed growth stocks for more than a decade. For any asset allocator, the apparent result is tough to ignore: Value looks cheap and growth looks expensive (see Figures 1 and 2 in PDF available below). To some, it’s evidence that the time has come to significantly shift allocations from growth to value in anticipation of some reversion to the mean. But others ask, “Why bother?” Their argument goes: 1) value hasn’t worked, 2) we don’t see rates rising, 3) chances are low that the economic cycle will accelerate above 2019 levels, and 4) we are tired of seeing these charts each year and expecting a change in future returns to value (or, as Einstein put it in his definition of insanity, doing the same thing over and over again and expecting a different result).

As factor and manager researchers, we find that nearly every client we meet with wants to discuss the role value should play in their portfolios after such a long stretch of disappointment. Our answer is that value itself is not broken but the way it’s defined may well be. In this paper, we draw on our fundamental factor framework to assess the structural headwinds to value and how some managers are adapting; articulate the flaws in traditional valuation multiples given the evolving nature of corporate balance sheets; and propose a broader definition of value incorporating a discounted cash flow (DCF) valuation metric that, in combination with traditional multiples, may provide a more nuanced view of what’s “cheap” in today’s market environment.

Our key conclusions include the following:

  • We believe there is a value premium driven by market participant behavior and that, despite all the headlines, value investing is not…

To read more, please click the download button below.

Recommended for you

EMs: With great challenges come great opportunities
From health and wellness to climate change and more, the COVID-19 crisis has spawned or accelerated compelling investable themes across a range of EM countries. Against that backdrop, four of Wellington’s EM equity portfolio managers share their latest insights.
October 2020
EMs: With great challenges come great opportunities
,
Tracking the green transition in emerging markets
COVID-19 has ratcheted up environmental debates across emerging markets and highlighted the intersection of those concerns with local supply chains and infrastructure gaps. Equity Portfolio Manager Liliana Castillo Dearth looks at China as a case study.
October 2020
Tracking the green transition in emerging markets
,
The dawn of divergence and the art of subtlety
Multi-Asset Strategist Nick Samouilhan highlights the key divergences we should start to see as fundamental differences between companies, sectors, and countries begin to matter more.
October 2020
The dawn of divergence and the art of subtlety
,
On the ground in emerging markets
Portfolio Manager Greg Mattiko profiles the COVID-19 pandemic’s varied outcomes on different emerging markets, explores the potential opportunities from falling correlations, and highlights the benefits of a global approach to emerging market investing.
September 2020
On the ground in emerging markets
,
On the ground in Asia with Niraj Bhagwat
Portfolio Manager Niraj Bhagwat offers his local perspective on Asia, sharing the opportunities and risks he sees in today's volatile and challenging markets.
September 2020
On the ground in Asia with Niraj Bhagwat
,
Redefining “value” for a modern economy
Value stocks are cheap and growth stocks are expensive. End of story, right? Our Fundamental Factor Team argues that the traditional tools for measuring value are out of date and offers a more nuanced view.
September 2020
Redefining "value" for a modern economy
,
Climate change and emerging markets: Assessing opportunities and challenges
Emerging markets are on the front lines of climate change. Aware of the challenges, many EM companies are developing solutions, shifting business models, and realigning corporate policies to help them prepare. Two of our EM portfolio managers share insights on the investing landscape and offer a framework for incorporating climate-related themes into a portfolio.
September 2020
Climate change and emerging markets: Assessing opportunities and challenges
,
Studying outsiders: Blending the advantages of public and private equity
Learn why we believe a longer-term public market approach focused on strong capital allocation could combine the benefits of public and private equity.
August 2020
Studying outsiders: Blending the advantages of public and private equity
,

We use cookies to improve your experience on our website. To accept cookies click Accept & Close, or continue browsing as normal. For more information, visit Cookies & Tracking NoticE.