The lessons of deep value investing
Deep value investing has returned to favour since March 2009, but many managers missed the rebound after switching to a higher quality portfolio, according to a review of deep value investing by Ibbotson.
Fraser Murray, head of equities and property at Ibbotson, said the policy of cutting value for quality was flawed because it ignored the fact that share markets price in expectations. Value stocks are priced down due to concerns about debt funding and capital levels, he added.
“As history has shown us, these deep value stocks were priced too pessimistically. This pessimism is one of the key reasons that value investing has a positive long-term return relative to the market,” he said.
The highest returns usually follow the periods of greatest pessimism, while the value premium is arguably the most statistically significant risk premium that exists, Murray added.
“Deep value investing in an investment style with a long-term history of performance and tax effectiveness,” he said.
However, a shift away from value stocks in late 2008 and early 2009 was justified due to the difficulty of timing that type of investment. Being overweight in value stocks would have been seen as a disproportionate amount of portfolio risk at that time, Murray said.
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