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Johannesburg - Value investors Cannon Asset Management reckon that now is a good time for active asset managers to be on the lookout for value.
"It is often when the outlook is most bleak that deep value emerges. Being in the heart of the subprime crisis, and surrounded by pessimistic economic forecasts, now is an ideal environment for a value orientation," CEO Adrian Saville wrote in a recent report entitled: "A last gasp for growth?"
Saville said while one or the other of the two investment philosophies - value and growth - tended to preside over the other at times, and growth stocks had outperformed value stocks by about 9% since the middle of last year, the global evidence suggested that value investing held out the greater prospect for investment success.
This held true in South Africa as well, he said, with value stocks delivering an average annual return some 10.2% ahead of growth stocks between 2000 and the end of 2007. Their relative performances in earlier decades had reinforced this result, he said.
But Saville says the recent outperformance of growth ahead of value stocks has "unfortunately" resulted in many investors losing the advantage.
He says drifting between styles is also an enemy of long-run success, because it is expensive to convert a value portfolio into a growth portfolio and would be the same to do so from growth back to value when market sentiment turned.
The big risk in following the growth philosophy was that blue sky potential did not materialise or than high growth environments disappeared faster than anticipated, Saville said.
But, with value investing, Saville said, failure might stem from value remaining trapped "because catalysts do not materialise, or from management failing to recover underperforming assets".
He cites Telkom as a possible contemporary example of this type of risk (get more detail on the Telkom value trap in the April 10, 2008 edition of Finweek Take a hike).
Saville explains that value investors look at asset value rather than company growth, ignoring headline indicators like interest rate or economic growth forecasts: "Value investors are often opportunistic, taking advantage of falling prices and focusing on the quality of resources that a firm can and should utilise rather than worrying about this year's profits".
In fact, taking a single year's earnings seriously can also be one of the biggest mistakes in financial analysis, Saville warns.
He says it can take a long time for value to be realised: "Value can remain value for a long time because momentum investors often continue selling long after the stock has already fallen to below "fair" value. Value investors must be patient. It pays in the long term."
- Fin24.com