How to be a value investor in a bull market
Tim Price, asset manager of Price Value Partners, talks to IGTV’s Victoria Scholar about the challenges of being a value investor in the current market.
Tim Price, asset manager of Price Value Partners, says the disparity between ‘growth’ and ‘value’ returns in the US in 2017 was remarkable. The Russell 1000 growth index gained 30.2% for the year, versus 13.7% for the Russell 1000 value benchmark.
Price bases his investment decisions around finding value in equity markets. His fund, the VT Price Value Portfolio, seeks to invest in listed businesses of exceptional quality trading at undemanding multiples. Investment decisions are made according to the principles of value investing, developed by Benjamin Graham. However, being a value investor in a bull market where equity indices hit an endless stream of record highs is no easy task when other strategies, like growth and momentum, continue to do much better.
The VT Price Value Portfolio is most exposed geographically to Japan (48%), followed by Vietnam (18%), Europe (17%), Canada (9%) and the US (10%).
Exposure to Japanese equities has been a rewarding trade recently with the Nikkei 225 hitting a 26-year high this month. However, some analysts are concerned about the strength of the yen weighing on the Japanese exporters and derailing the Bank of Japan’s (BoJ’s) path in the direction of monetary policy normalisation. Price is not worried by the stronger currency and says that the Japanese stock market can now comfortably co-exist with a strengthening yen. He’s also optimistic about the future outlook for corporate Japan, as well as the current government, with the so-called ‘Abenomics’ bearing fruit.
In one of his recent notes, Price highlights a number of key market indicators, which he says suggests a potential equity market correction. He says fear is almost non-existent and the bull market is not behaving as it normally would, as record-breaking trends become normal.
It pays to think independently, he argues, adding, this ‘bull trap’ could cost investors half of their invested wealth. One of the so-called ‘crash indicators’ that Price points to is the Cyclically Adjusted Price to Earnings (CAPE) ratio, made popular by economist Robert Shiller, which stands at over 30. It has only been this high on two instances in history: ahead of the Wall Street Crash of 1929 and the dotcom bubble in 2000.
His second crash indicator focuses on the tech sector. Price says the Facebook, Apple, Amazon, Netflix and Alphabet’s Google (FAANG) stocks are distorting the market and, while the overall stock market is rising, that doesn’t mean every company is.
The third crash indicator he points to is around the reasoning behind stock investing. Price thinks market participants are buying stocks because they are going up in price, rather than because they think the companies are worth investing in.
While Price admits that this is one of the longest periods in history where ‘value’ has underperformed, he says it is the best long-term performing strategy that exists.