In their own way, Alliance Bernstein and Goldman Sachs seem to think so. Both published articles this week on CNBC. As we pointed out over a week ago, it is a fact that “Value” has tended to substantially underperform “Growth” over the last 10 years. Will there be a reversion to the mean, or is this just the new state of play? We think the debate continues.
From our perspective, Alliance Bernstein makes some cogent arguments. One of the arguments we like most is that “moats” are no longer as defensible and sustainable as they used to be. Why? Technological obsolesce. Another argument points out that growth companies are typically “asset lite” (my words) and therefore, in my view, book value measures can’t truly capture complete intrinsic value. They also make the case that easy monetary policy may have killed expected mean reversion and that a rising rate environment may be the only condition that would restore this relationship (which it does not expect in the near- to intermediate- term).
As we see it, Goldman finesses the argument. Essentially, they point out that spread between the most expensive stocks and the cheapest stocks is now the widest it has been in the last nine years, which usually implies that there will be a reversion to the mean – i.e. value will generally outperform from here. However, they make the case that a “rotation into value stocks would require a sustained improvement in investor economic growth expectations, potentially driven by global monetary policy easing.” In effect, Goldman believes we would need a rising tide lifting all boats as a result of easy monetary policy. They counsel implementing value with a “quality” tilt (essentially incorporating low volatility).
So what are we to make of all of this? First, remember, investment banks employ a myriad of economists and research folk and are required to have an opinion on such things. That said, we have always been somewhat suspect of the labels that are applied to companies based upon a simplistic notion and a single metric. As investing has become more sophisticated and data is able to be analyzed more quickly and in greater depth, is it unreasonable to expect that simple rules that have applied in the past, will increasingly come under scrutiny and better, more nuanced, measures have the potential for greater merit? Not in our opinion. We believe a prudent investor continues to test historical assumptions and continues to question the investment value of investment rules and guidelines – that’s just part of maintaining a rigorous investment approach.
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