Value-based investment strategies can sometimes be perceived as old fashioned and less capable of long-term wealth generation than growth-based strategies. But, according to CIO Phil Davidson, history shows us that the slow and steady performance of value-based investment strategies could be a more attractive approach for long-term investors.
Value-based investment strategies can sometimes be perceived as old fashioned and less capable of long-term wealth generation than growth-based strategies. But, according to CIO Phil Davidson, history shows us that the slow and steady performance of value-based investment strategies could be a more attractive approach for long-term investors.
Value-based investment strategies can sometimes be perceived as old fashioned and less capable of long-term wealth generation than growth-based strategies. But, according to CIO Phil Davidson, history shows us that the slow and steady performance of value-based investment strategies could be a more attractive approach for long-term investors.
Value-based investment strategies are sometimes perceived as old fashioned and less capable of long-term wealth generation than growth-based strategies. But history— especially over the past ten years—demonstrates that a better analogy might be the tortoise (for value) versus the hare (for growth) where slower but steadier could be a more attractive approach for long-term investors.
The Fundamental Tenets of to value managers. These are companies
Value Investing which seem inexpensive based on attractive valuation multiples. But their underlying One thing that distinguishes value-based fundamentals usually reveal businesses investment managers from their growth- in secular decline (e.g., newspaper Phillip N. Davidson, CFA oriented peers is their strong focus on the publishers) or broken business models Chief Investment Officer balance sheets of companies in addition U.S. Value Equity (e.g., book retailers). The ability to avoid to earnings and cash flow. A holistic view value traps is probably one of the most of balance sheet fundamentals considers distinguishing characteristics of successful items that don’t necessarily appear (such value managers and reflects a truism that as operating leases for large retailers) but what you don’t own in your portfolio is as “Fundamental bottom-up ought to be factored into calculations of important as what you do own. Knowing capital structure and leverage. In the real company analysis is the when to buy and sell a good value company world, businesses of every kind encounter is also crucial. We don’t fall in love with cornerstone to value investing setbacks and unforeseen challenges. When our investments and understand that even these impact sales and earnings, a healthy and requires understanding highly successful companies go through balance sheet is a strong foundation and a company’s ability to sustain periods of over- and under-valuation. safety net for value investors. an attractive long-term Portfolio construction is another crucial skill As value managers, we generally avoid rate of return.” for successful value managers. Good value companies with high leverage. We look for managers understand the risks they are businesses with strong and sustainable taking and expect to be rewarded for these business models and value propositions, and risks based on superior insight and analysis. we avoid companies where management To use a baseball analogy, most value has made—or is making—poor capital managers look for a lot of singles versus allocation decisions. These points reflect swinging for the fences based on a handful a fundamental bias toward quality and of active bets. We believe a key success sustainability. We are interested in factor is to limit active risk and construct companies’ performance over the entire portfolios with positive expected excess economic cycle—not just how well they can return but less volatility than the benchmark. do in the good times. Companies in highly cyclical industries can appear attractive Finally, all these insights depend on having as their sales and earnings accelerate in a proven and disciplined investment process a growth phase, but understanding their run by seasoned professionals acting as performance and value over their entire a team. Along with deep experience, it is earnings cycle is what matters. Fundamental also critical to strive for continuous process bottom-up company analysis is the improvement based on ongoing learning. cornerstone to value investing and requires And that depends on one final hallmark of understanding a company’s ability to sustain a successful value manager: Never become an attractive long-term rate of return. overconfident in the face of a constantly changing economic environment and Stock Selection and Portfolio financial markets. The opinions expressed are those of Phillip N. Davidson, CFA, and are no guarantee of the future Construction performance of any American Century Investments Successful value managers are excellent portfolio. stock pickers. Value traps are anathema For educational use only. This information is not intended to serve as investment advice.