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CONTRIBUTORS

Stephen H. Dover, CFA

Executive Vice President, Head of Equities, Chief Investment Officer

As an industry, we may have over-simplified equity investing into “value” versus “growth” strategies, particularly when looking at value-based metrics such as on price-to-earnings (P/E) or price-to-book (P/B) ratios. Many lifelong investment managers believe value outperforms growth over the very long run, and there is much academic research supporting this belief. But, this simply hasn’t rung true for markets during the past 10 years.

  • There is a lot of opportunity in value, in my view.
  • And there are value traps—companies where the risk profile is changing, and fundamentals viewed through the windshield will not resemble those seen in the rear-view mirror. Whether it’s technology or regulation or consumer behavior, there may be structural changes compromising the business, for good. It may be a long, winding journey, but the ultimate destination is down.
  • As such, I believe the future of value isn’t to invest in a value index. Rather, it’s to try to look at forward earnings, forward P/E ratios, and forward P/B ratios, and invest in companies that are undervalued based on a forward projection.

None of the value indexes are able to apply a forward look to investing. A good active manager understands where to look for value as opposed to following the up and down momentum of value indexes. For further discussion, I invite you to read “Value Trap or Trapped Value?” by John Reynolds, Portfolio Manager of Templeton Global Equity Group.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Value securities may not increase in price as anticipated, or may decline further in value. To the extent a portfolio focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a portfolio that invests in a wider variety of countries, regions, industries, sectors or investments. Actively managed strategies could experience losses if the investment manager’s judgment about markets, interest rates or the attractiveness, relative values, liquidity or potential appreciation of particular investments made for a portfolio, proves to be incorrect. There can be no guarantee that an investment manager’s investment techniques or decisions will produce the desired results.

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