Text on screen: PIMCO
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Text on screen: Raji Manasseh, Equity Strategist
Raji Manasseh: After a long and deep period of underperformance, value’s recent outperformance may just be the beginning of a new trend. What’s behind this performance, and importantly, is it sustainable?
Text on screen: Rob Arnott, Founder and Chairman, Research Affiliates
Rob Arnott: Our most important finding was that value’s underperformance,
Chart on screen: TITLE – After generating a long-term premium, value has underperformed since 2006. The line chart shows the relative performance of value versus growth from 1963 through 2018. Value performance had been inching up through the years, with drops in performance happening after market inflections, such as Nifty Fifty and the oil crisis in the 70s, and the Biotech Bubble in the 90s; value recovered after a sharp decline during the Tech Bubble; climbed back to new highs and has been underperforming since 2006.
58 percent underperformance if you look at the performance from back in 2007 through 2020, a 13-year drawdown where value underperformed growth by 58 percentage points. But during that drawdown, it got cheaper by 68 percent. Now, think of it this way. If you have a stock that’s down 58 percent, the temptation is, "Get me out of here.” But if its price to book value is down 68 percent, then relative to its fundamentals, it’s cheap.
Second part that was important was, that’s all based on price to book value, as a value metric. And, price to book value is deeply flawed. It ignores all of the intangibles that, in today’s economy, are far more important for most businesses than the bricks and mortar.’
Text on screen: TITLE – Why value stocks are cheaper today:, BULLETS – Price to book value relative to fundamentals, Intangibles
So, with those two key points, we found that value was not necessarily dead and gone,
but in fact had become cheaper by 30 percent than it was at the peak of the tech bubble.
Raji Manasseh: Rob, you're a portfolio manager on PIMCO’s RAE suite, a suite of systematic active value strategies. Tell us today, given what you've said about value investing, how is RAE positioned to take advantage of value’s comeback?
Rob Arnott: RAE is arguably a unique strategy in the asset management arena. It’s an active equity strategy that anchors on fundamental weights for companies, instead of cap weights.
Text on screen: TITLE – RAE strategy filters out companies that are:, BULLETS – Low quality, Risk of being value traps, Cheap stocks in free fall
So, we use multiple measures of value to identify assets. We filter out the companies that are extremely low quality, the companies that are trading at cheap valuation levels, but the quality suggests a risk that they might be value traps: stocks that look cheap on their way to zero. By filtering these out you’re less likely to encounter value traps, you’re more likely to encounter stocks that are cheap because they’re underpriced.
And I’ve seen this play out again and again. When value struggles, the snapback can be fast, can be long-lasting, and can be pronounced.
Text on screen: For more insights and information, visit pimco.com
Text on screen: PIMCO 50 1971-2021
Please note that the following contains the opinions of the manager as of the date noted, and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.
Past performance is not a guarantee or a reliable indicator of future results.
A word about risk: Equities may decline in value due to both real and perceived general market, economic and industry conditions. Investments in value securities involve the risk the market’s value assessment may differ from the manager and the performance of the securities may decline. Model Risk is the risk that the investment models used in making investment allocation decisions may not adequately take into account certain factors and may result in a decline in the value of an investment. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee there is no assurance that private guarantors will meet their obligations. High-yield, lower-rated, securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Derivatives may involve certain costs and risks, such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested.
The terms “cheap” and “rich” as used herein generally refer to a security or asset class that is deemed to be substantially under- or overpriced compared to both its historical average as well as to the investment manager’s future expectations. There is no guarantee of future results or that a security’s valuation will ensure a profit or protect against a loss.
Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.
This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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