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The return of value investing

Anthony Fensom  |  19 May 2016Text size  Decrease  Increase  |  

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Anthony Fensom is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind.


Morningstar has long urged investors to seek companies with sustainable competitive advantages but with attractive valuations. With "growth" investing dominating in recent times, value has been hard to find, but this may be about to change, according to analysts.

First, some definitions: Growth investing is defined as investing in stocks with promising earnings potential, with the aim of maximising capital gains. In contrast, value investing could be considered what billionaire US investor Warren Buffett has called "finding an outstanding company at a sensible price".

As Buffett also said, "Price is what you pay; value is what you get". Yet finding value has been hard to do over the past two years, with markets in "risk-off" mode and investors worried by the lack of economic growth.

Stocks which have performed well during this period have included those with high return on equity, high earnings per share (EPS) growth and high dividend per share (DPS) growth. In Australia, high EPS growth stocks have included Blackmores (BKL) and Domino's Pizza (DMP), while DPS growth stocks have included Sydney Airport (SYD).

According to Nikko Asset Management (Nikko AM) portfolio manager and senior analyst, Jason Kim, fear's domination of financial markets has spurred investors to chase defensive growth stocks almost at any price, driving their valuations to extreme levels, while shunning the rest.

As a result, perceived "safe" stocks have become "ridiculously expensive" and even risky, helping growth managers show strong performance but leaving value managers lagging behind.

However, Kim thinks this trend could be set to reverse, benefitting industrials such as Incitec Pivot (IPL), property groups such as Lend Lease (LLC) and even the big four banks.

"We often talk within our team about how the markets have forecasted seven out of the last four recessions," Kim says.

"Looking ahead, we believe that not only will the Australian equity market be more constructive, but we also see the scene being more conducive for a snap back to value."

According to Kim, value has outperformed growth investing in the Australian market by an average of around 2 per cent a year since 1989 (as at 31 October 2015), and importantly, with less risk.

Brad Potter, head of Australian equities at Nikko AM, says signs have emerged of a return to value, amid valuations for some market favourites becoming overly stretched.

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