Is Equity Value Dead?
Joan Lee, Investment Manager of Unigestion’s Alternative Risk Premia fund
Buying cheap and selling expensive stocks, which is at the heart of equity value investing, has proved incredibly tricky for investors over the past few years. Bar the rally in the second half of 2016, if you had held the equity value risk premium from the end of 2014 until today, you would have essentially earned next to nothing.
So the question now for many investors is whether equity value is truly dead, or is there still life left in it yet?
Year to date, the maximum drawdown (the loss experienced from peak to trough, until a new peak is reached) of equity value risk premia has surpassed the 6% mark, with some managers suffering even larger drawdowns.
The unexpected correlation between the Equity Value and Equity Momentum factor earlier this year further compounded the pain, particularly hurting funds that aim to harvest multiple equity market neutral risk premia.
Therefore, looking at the numbers in isolation could seem rather ominous. But can last month and historical parallels paint a different picture?
In reality, the recent behaviour of the risk premium is nothing new and is arguably typical during the late phase of a macroeconomic cycle, which we believe we are currently in. For example, between 1998-2000 the value factor went through a similar phase of underperformance and experienced drawdowns of over 10%.
But what is important to note is that time and time again, equity value strategies have subsequently outperformed after painful periods of underperformance. So rather than questioning whether equity value risk premia is past its sell-by date, should we really be asking whether we are on the brink of a resurgence in the coming months and years?
If we are to look at the month to date to 11 October 2018 for example, there are signs of recovery with the value factor up 1.2% during a period of market turmoil when the MSCI World Net TR (USD) was down 6.3%. Furthermore, the correlation between value and momentum, which previously hurt investors, is now returning to normal levels which should benefit managers looking to exploit this segment of the market.
All in all, we believe that equity value has proven its worth over many decades and we are confident that the fundamental drivers behind it mean that it is alive and kicking, and far from its deathbed. Furthermore, it is important for investors to consider diversifying across the breadth of the alternative risk premia spectrum so that they are not over-reliant on a single one. We strongly believe in combining a number of equity factors with other cross-asset alternative risk premia, which have different sensitivities to macroeconomic regimes.