The death of value investing

Twenty years ago, value investors were jubilant.  The internet bubble had burst and overpriced growth stocks were in torment.

Investors were piling into cheap stocks. Their love affair waxed strong as a series of large growth companies, like WorldCom and Enron, hit trouble.

Time and again, investors are dumping holdings in funds which specialise in value to reinvest in tech or sectors exposed to it, led by passive and quality growth

But internet fans are having the last laugh. The Nasdaq and Fang+ index of big tech stocks are hitting new records. Value stocks have lost their gains of the noughties, and some. 

Hedge funds who like a bargain have struggled. Sloane Robinson, a fan of emerging markets, will shut down at the end of the year.  Lansdowne Partners, once the doyen of UK hedge fund investment, is closing down its core hedge fund, to become long-only. 

Berkshire Hathaway, dragged down by its value-driven approach, has only been saved from disgrace by its 5.5% stake in Apple, which now accounts for 43% of its portfolio. 

ExxonMobil’s market value has fallen below Tesla, as the clean energy revolution picks up speed. 

M&G Recovery, the darling of the UK market during the dark days of the 1970s and 1980s, has suffered torment as its small-cap and value stocks have refused to recover. 

Fund administrators at M&G have publicly admitted the fund has failed to deliver value. It is reviewing its fees.  Value rival Neil Woodford shuttered his boutique in 2019.

Time and again, investors are dumping holdings in funds which specialise in value to reinvest in tech or sectors exposed to it, led by passive and quality growth.

Value’s agony may get worse. Banks, real estate, oils and natural resources are in freefall, along with the airline, hospitality and travel sectors, devastated by Covid-19. 

Tech disruption was always going to happen. But it has become supermassive due to modern monetary policy.

Ray Dalio, founder of Bridgewater Associates, the hedge fund giant, recently told a Bloomberg conference:  “Today the economy and the markets are driven by the central banks and the coordination with the central government. Capital markets are not free markets allocating resources in traditional ways.”

This has developed over the last twenty years as increasingly politicised central banks, led by the Fed, have injected liquidity to stop markets crashing through the floor.  China has just rejoined the party as its low rates have triggered a surge in its stock market. 

The latest cut in interest rates to nearly zero, plus judicious printing, amounts to moral hazard on a grand scale.

Money has been channelled towards growth opportunities, helping them to develop at unprecedented speed.  Anti-trust policy is being kept weak, encouraging scale. Fiscal attempts to generate jobs, post Covid-19, will also involve tech.

Capital has been sucked out of value stocks because you don’t need their balance sheet strength when central banks have your back. On the contrary, you need to invest to keep ahead of the opposition.

It has created unprecedented opportunities for forward-looking family offices and created a stream of new ones

The proof statement for the potential in the new economy is wealth. The past performance of tech-driven opportunities has enriched a huge number of people, particularly the founders of tech companies. 

It has created unprecedented opportunities for forward-looking family offices and created a stream of new ones. 

According to Adaptive Markets by Andrew Lo of MIT: “Individuals and species adapt to their environment. If the environment changes, the heuristics of the old environment might not be suited to the new one. This means their behaviour will look irrational…”

Thus, it has become rational to back growth and the new economy and irrational to back value and the old economy, as we knew it, twenty years ago.

Since growth investing has become a rational position, investors keep piling into venture capital, even though they are taking unlisted minority positions in venture capital which risk dilution through subsequent fundraisings.

Because value is irrational, investors avoid old economy small caps, even though their shares are dirt cheap, after a performance period which has become the worst since the Great Depression of the 1930s.