Value Investors Are About To Finally Out Perform the Market

As a style of investing, Value has NOT been the way to go in 2015 – just ask Warren Buffet and a host of hedge fund and institutional money managers who regularly look to buy stocks at a discount. 2015 has not been kind to Buffet’s Berkshire Hathaway as the company’s year to date performance has fallen behind the market by double digits. In fact, Value (as an asset class) has not underperformed Growth (as an asset class) by this wide of a margin since just before the dot com bubble broke in March of 2000.
As most of you know, I like to invest and put our clients’ money to work in stocks that offer a good measure of downside protection by not overpaying for the shares of a business. Our fundamental analysis points us towards companies that are trading for at least a 20% discount to their intrinsic value.
In 2015, so far this “value” approach to investing has caused many of our clients’ portfolios to underperform the S&P and other dynamic benchmarks that we compare to. Although this underperformance is not what we seek, in the long run, the current underperformance may lead to even greater outperformance as the market unleashes the value of our holdings.
A catalyst that should start to create some positive momentum for value stocks is a potential rate hike by the Federal Reserve, which could come as early as December 15th of this year. In the past, when rates have been low for an extended period of time, and a tightening cycle begins, value stocks have produced outperformance vs. growth stocks.
In a recent Bloomberg article, a team of analysts led by Ian Scott of Barclays London office had this to say:
U.S. interest rates have been a key driver of style and sector performance within global equities. If, as expected, the Fed starts raising rates in December, this could have profound implications for style and sector leadership. We think the most robust conclusion is a market driven more by value than either quality or growth. Sectorally we think this favors financials, late-cycle cyclicals, and energy. On the other hand, staples and healthcare as well as utilities and telecoms could struggle globally.
There is no doubt that I have been setting up our clients’ portfolios since late last year for this exact move up in rates; however, we were a bit early as the Fed has delayed an interest rate hike and did not move this past spring.
I believe that your patience will be rewarded as we enter into a new stock market regime of value stock leadership!
Best regards,
Patrick Collar

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