discussing traditional value investing and common
TRANSCRIPT
![Page 1: Discussing Traditional Value Investing and Common](https://reader036.vdocuments.mx/reader036/viewer/2022081406/6294d9f9589dce69b95adc84/html5/thumbnails/1.jpg)
Investing Where It Counts
High-Conviction Investing | Outcome-Oriented Solutions westwoodgroup.com
Discussing Traditional Value Investing and Common Misconceptions
September 2020
Philip DeSantis, CFA®
Senior Vice President, Head of Product & Client Solutions
![Page 2: Discussing Traditional Value Investing and Common](https://reader036.vdocuments.mx/reader036/viewer/2022081406/6294d9f9589dce69b95adc84/html5/thumbnails/2.jpg)
2 Investing Where It Counts
Our goal for the session
What are the key
factors in making an
asset allocation and
manager decision
going forward?
How can you achieve
better performance during
periods of economic
distress with more
consistent performance
long term if you want
to twist to Value?
Help advisors
understand what’s
changed with value
investing over the last
40 years
2 Investing Where It Counts
![Page 3: Discussing Traditional Value Investing and Common](https://reader036.vdocuments.mx/reader036/viewer/2022081406/6294d9f9589dce69b95adc84/html5/thumbnails/3.jpg)
3 Investing Where It Counts
Level setting:
Defining traditional
value
Morningstar Style Box™
Large
Medium
Small
Value Blend Growth
Price-to-Book
Price-to-Earnings
3 Investing Where It Counts
![Page 4: Discussing Traditional Value Investing and Common](https://reader036.vdocuments.mx/reader036/viewer/2022081406/6294d9f9589dce69b95adc84/html5/thumbnails/4.jpg)
4 Investing Where It Counts
Value stocks historically outperformed up until 2007
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
'80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06
Time Period: January 1980 – December 2006. Data Source: eVestment. Past performance is not indicative of future results.
Growth of $1,000
1980-2006
Russell 1000
Growth
Russell 1000
Value
![Page 5: Discussing Traditional Value Investing and Common](https://reader036.vdocuments.mx/reader036/viewer/2022081406/6294d9f9589dce69b95adc84/html5/thumbnails/5.jpg)
5 Investing Where It Counts
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
Since 2007, Value stocks have underperformed
Time Period: January 2007 – June 2020. Data Source: eVestment. Past performance is not indicative of future results.
Growth of $1,000
2007-2020
Russell 1000
Growth
Russell 1000
Value
![Page 6: Discussing Traditional Value Investing and Common](https://reader036.vdocuments.mx/reader036/viewer/2022081406/6294d9f9589dce69b95adc84/html5/thumbnails/6.jpg)
6 Investing Where It Counts
Accounting practices have failed to keep up with how companies invest and grow
As companies have shifted
their investments away from
old-world factories and
plants, so too have markets,
as those sectors most
exposed to cyclical industries
have decreased in weight
over the last two decades
As of June 30, 2020. Data Source: Cornerstone Macro.
Structures + Industrial Eqp
+ Transportation Eqp
Software + Tech Eqp + R&D
Capex
0
10
20
30
40
50
60
70
80
198
0
198
2
198
4
198
6
198
8
199
0
199
2
199
4
199
6
199
8
200
0
200
2
200
4
200
6
200
8
201
0
201
2
201
4
201
6
201
8
202
0
Capex Components% Total Capex
Since 1980
![Page 7: Discussing Traditional Value Investing and Common](https://reader036.vdocuments.mx/reader036/viewer/2022081406/6294d9f9589dce69b95adc84/html5/thumbnails/7.jpg)
7 Investing Where It Counts
Price-to-book is no longer a predictive metric and has become distorted
1975 1985 1995 2005 2018
Tangible vs. Intangible Assets for S&P 500 Companies, 1975-2018
• IBM
• Exxon Mobile
• Procter & Gamble
• GE
• 3M
• IBM
• Exxon Mobile
• GE
• Schlumberger
• Chevron
• GE
• Exxon Mobile
• Coca-Cola
• Attria
• Walmart
• GE
• Exxon Mobile
• Microsoft
• Citigroup
• Walmart
• Apple
• Alphabet
• Microsoft
• Amazon
Source: 2019 Intangible Assets Financial Statement Impact Comparison Report, Aon and Ponemon Institute. April 2019.
Tangible Intangible
$715B
Intangible: $122B
Tangible: $594B
$1.5T
Intangible: $482B
Tangible: $1.02T
$4.59T
Intangible: $3.12T
Tangible: $1.47T
$11.6T
Intangible: $9.28T
Tangible: $2.32T
$25.03T
Intangible: $21.03T
Tangible: $4.00T
5 L
arg
es
t G
lob
al
Co
mp
an
ies
by
Ma
rke
t C
ap
![Page 8: Discussing Traditional Value Investing and Common](https://reader036.vdocuments.mx/reader036/viewer/2022081406/6294d9f9589dce69b95adc84/html5/thumbnails/8.jpg)
8 Investing Where It Counts
Corporate buybacks have distorted price-to-book as a value metric
As of June 30, 2020. Data Source: Strategas, Compustat and FactSet.
Between 2009 and 2018,
465 companies in the
S&P 500 spent $4.3 trillion
on buybacks.
Buybacks can warp the
value metrics, making
price-to-book a useless
measurement for valuing
many stocks.
Price / Book
(LHS)
Price
(RHS)
500
1000
1500
2000
2500
3000
3500
200
300
400
500
600
700
800
900
1000
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
S&P 500 Book Value Per Share vs. S&P 500 Price
![Page 9: Discussing Traditional Value Investing and Common](https://reader036.vdocuments.mx/reader036/viewer/2022081406/6294d9f9589dce69b95adc84/html5/thumbnails/9.jpg)
9 Investing Where It Counts
Traditional Value Hasn’t
Worked
-600
-400
-200
0
200
400
600
800
1000
EV/EBITDA P/Book Forward P/E
Value Factors
Traditional Value Hasn’t
Worked
Data run: August 2020. Source: Strategas Research Partners. The averages referenced above are the averages of the three previous 10-Year Treasury / 2-Year Treasury inversion periods that occurred in 1998, 2000, 2005 and 2019.
U.S. All Cap Universe is represented above by the Russell 3000. The U.S. Small Cap Universe is represented above by the Russell 2000. High Debt refers to the highest leverage quintile.
The big miss: Traditional Value factors haven’t worked during downturns
Factor Performance Following 10-Year
Treasury / 2-Year Treasury Yield Curve Inversion
U.S. All Cap and Small Cap Universes
-600
-400
-200
0
200
400
600
800
1000
1200
1400
EV/EBITDA P/Book Forward P/E
Value Factors
Alp
ha
(bp
s)
Alp
ha
(bp
s)
U.S. All Cap (WTD Avg Market Cap $368B) U.S. Small Cap
3-Mo. Avg. 6-Mo. Avg. 12-Mo. Avg.
![Page 10: Discussing Traditional Value Investing and Common](https://reader036.vdocuments.mx/reader036/viewer/2022081406/6294d9f9589dce69b95adc84/html5/thumbnails/10.jpg)
10 Investing Where It Counts
Traditional Value has become riskier for investors
As of June 30, 2020. Data Source: Cornerstone Macro.
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
201
8
201
9
Correlation of Low P/E Stocks to High Beta Stocks
Correlation Visual AidBeta
1.15 1.19Beta of High P/E Stocks Beta of Low P/E Stocks
0.70
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
0.70
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
201
8
201
9
Beta of Low P/E StocksSince 2000
![Page 11: Discussing Traditional Value Investing and Common](https://reader036.vdocuments.mx/reader036/viewer/2022081406/6294d9f9589dce69b95adc84/html5/thumbnails/11.jpg)
11 Investing Where It Counts
Quality: The key to mitigating downside risk and creating more consistency long term
As of March 31, 2020. Data Source: Jefferies, using the Russell 1000 Index.
Value factors alone
generated 88% cumulative
return over the last 10 years
Value + Quality factors
added additional 35%
for a total of 123%
cumulative return
88%
123%
0%
20%
40%
60%
80%
100%
120%
140%
Value Value + Quality
Value Factor Alone vs. Value and Quality TogetherCumulative Return Last 10 Years
![Page 12: Discussing Traditional Value Investing and Common](https://reader036.vdocuments.mx/reader036/viewer/2022081406/6294d9f9589dce69b95adc84/html5/thumbnails/12.jpg)
12 Investing Where It Counts
Quality factors:
What are they?
Profitability
12 Investing Where It Counts
Stability
Financial strength
Quality companies…
Offer a long-term
return premium
due to sustainable
competitive
advantages and
pricing power
Maintain higher
profitability with
less cyclicality and
strong balance
sheets than
traditional value
stocks
Demonstrate high
returns on capital
that compounds
wealth over the
long term, creating
shareholder value
by reinvesting
profits, M&A and
paying dividends
Typically perform
better during periods
of economic
uncertainty with
better consistency
and lower downside
risk; all of which
traditional value
stocks lack
![Page 13: Discussing Traditional Value Investing and Common](https://reader036.vdocuments.mx/reader036/viewer/2022081406/6294d9f9589dce69b95adc84/html5/thumbnails/13.jpg)
13 Investing Where It Counts
Data run: August 2020. Source: Strategas Research Partners. The averages referenced above are the averages of the three previous 10-Year Treasury / 2-Year Treasury inversion periods that occurred in 1998, 2000, 2005 and 2019.
U.S. All Cap Universe is represented above by the Russell 3000. The U.S. Small Cap Universe is represented above by the Russell 2000. High Debt refers to the highest leverage quintile.
Periods of distress: Quality factors, on the other hand, worked
Factor Performance Following 10-Year
Treasury / 2-Year Treasury Yield Curve Inversion
U.S. All Cap and Small Cap Universes
U.S. All Cap (WTD Avg Market Cap $368B) U.S. Small Cap
3-Mo. Avg. 6-Mo. Avg. 12-Mo. Avg.
-400
-200
0
200
400
600
800
1000
1200
1400
1600
1800
FCF Growth ROE High Debt
Quality Factors
-400
-200
0
200
400
600
800
1000
1200
1400
1600
FCF Growth ROE High Debt
Quality Factors
![Page 14: Discussing Traditional Value Investing and Common](https://reader036.vdocuments.mx/reader036/viewer/2022081406/6294d9f9589dce69b95adc84/html5/thumbnails/14.jpg)
14 Investing Where It Counts
Putting this into practice todayAs of June 30, 2020
Portfolio and index free cash flow excludes financial services and REITs due to cash flow statement calculation method within the sector. Free cash flow metrics are equally weighted. Portfolio forecasted growth rate and P/E reflect
Westwood’s analysts’ estimates. There is no guarantee that these forecasts and estimates will be accurate, or even approximately accurate, and the performance of the portfolio versus the benchmark may not correlate with the financial
results of constituent investments. Data Source: © 2020 FactSet Research Systems Inc. All Rights Reserved.
Quality Metrics
Free Cash Flow
MarginReturn on Equity Net Debt / EBITDA
Russell
1000 Value
___8.7% 15% 2.5x
Russell
2000 Value
___2.6% 2% 3.5x
Quality
and Value are always relative
![Page 15: Discussing Traditional Value Investing and Common](https://reader036.vdocuments.mx/reader036/viewer/2022081406/6294d9f9589dce69b95adc84/html5/thumbnails/15.jpg)
15 Investing Where It Counts
Quality is deteriorating at an increasing rate
U.S.: Rising share of companies with debt servicing
costs that are higher than profits
U.S.: Share of “zombie” firms
Note: Firm-level data is used to calculate the share of listed firms that are more than 10 years old with an interest coverage ratio less than one for three years in a row.
Sources: DataStream, Worldscope and DB Global Research, 2020.
![Page 16: Discussing Traditional Value Investing and Common](https://reader036.vdocuments.mx/reader036/viewer/2022081406/6294d9f9589dce69b95adc84/html5/thumbnails/16.jpg)
16 Investing Where It Counts
Small caps: An even worse picture if you buy fundamentals
Time Period: 1/1/1990 – 6/30/2020. Source: Strategas. Small Cap Universe shown above is represented by the Russell 2000 Index.
0%
10%
20%
30%
40%
50%
'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20
Percent of
Non-Earners
Percent of Non-Earners in Small Cap Universe(Based on Companies With Available Data)
27%
39%
44% 44%
![Page 17: Discussing Traditional Value Investing and Common](https://reader036.vdocuments.mx/reader036/viewer/2022081406/6294d9f9589dce69b95adc84/html5/thumbnails/17.jpg)
17 Investing Where It Counts
Small caps: High leverage could impact earnings stability
Time Period: 7/31/2000 – 6/30/2020. Source: Strategas. Small Caps shown above are represented by the Russell 2000 Index. Large Caps shown above are represented by the S&P 500 Index.
Spread Between
R2000 and S&P 500
Spread Between Small Caps and Large Caps
Net Debt to EBITDA
2000 2003 2006 2009 2012 2015 2018
Largest
Spread in
20 Years
![Page 18: Discussing Traditional Value Investing and Common](https://reader036.vdocuments.mx/reader036/viewer/2022081406/6294d9f9589dce69b95adc84/html5/thumbnails/18.jpg)
18 Investing Where It Counts
Invest at the
Intersection of
Quality and Value
18 Investing Where It Counts
![Page 19: Discussing Traditional Value Investing and Common](https://reader036.vdocuments.mx/reader036/viewer/2022081406/6294d9f9589dce69b95adc84/html5/thumbnails/19.jpg)
19 Investing Where It Counts
SmallCap Value: Result of investing at the intersection of Quality and Value
Inception: January 1, 2004. Data Set: January 1, 2004 – June 30, 2020 (Quarterly). Past performance is not indicative of future results. Performance shown assumes reinvestment of dividends and capital gains and is net of investment
management fees. Please see appendix for full performance disclosure for the SmallCap Value strategy. Rolling 5-year returns graph calculated using quarterly data. The 5-year period was chosen as a proxy for a typical market cycle.
Market environment returns reflect an average of the 5-year annualized returns within each market environment category. *Overall batting average reflects the percentage of rolling 5-year periods in which Westwood SmallCap Value
outperformed the Russell 2000 Value Index on a net-of-fees basis.
21.1%9.9%
7.2%
2.7%
Westwood
SmallCap Value1.0%
Russell
2000 Value(2.1%)
Value Added 3.1%
18.3%
2.8%
Down Markets
(<0% Return)
Normal
Up Markets
(0-15% Return)
Speculative
Up Markets
(>15% Return)
*Overall Batting Average: 100%
Market Environment
Annualized Rolling 5-Year Returns
Net of Fees Since Inception Westwood SmallCap Value vs. Russell 2000 Value Index
Normal Up MarketsSpeculative
Up MarketsDown Markets
Westw
ood S
mallC
ap V
alu
e R
olli
ng
5-Y
ear
Annualiz
ed R
etu
rns (
%)
Net of F
ees
Russell 2000 Value Rolling 5-Year Annualized Returns (%)
Underperform
Outperform
-10
-5
0
5
10
15
20
25
-10 -5 0 5 10 15 20 25