Why now is a 'great opportunity' for value investing

Why now is a 'great opportunity' for value investing
Dan Kemp, chief investment officer EMEA at Morningstar

This is the best opportunity in 20 years for value investing, according to Morningstar’s chief investment officer.

Dan Kemp, CIO of Morningstar’s EMEA division, told FTAdviser he disagreed with the consensus that the economic conditions caused by the coronavirus crisis favoured quality growth strategies.

Mr Kemp said: “Traditional value investing is putting your money where something looks immediately underpriced.

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“When you look at the UK market, it is priced very attractively compared to other equity markets.”

He said although it was hard to predict what would happen within politics or guess the actions of central banks, history had shown that prices swing back to a “fair value”.

Mr Kemp said: “When we look further out, what we always see through time is that prices revert back to a reasonable fair value. 

“The low prices we are seeing at the moment mean the more powerful that will be.”

As value funds and shares typically perform better when inflation and interest rates are rising and economic growth is strong, they have been out of favour for more than a decade.

They appeared to rally slightly at the end of 2019 but suffered since the monetary response to the pandemic prompted governments to pump money into the economy and slash interest rates — moves which typically favour growth.

But Mr Kemp added: “I absolutely do not think that value investing in its traditional form will die out. What we are seeing is an enormous stretch in valuations between the most and least popular stocks.

“I would take the contrarian view and say that I have seldom seen as good of an opportunity for value investing. 

“Rather than it being the death of value, I’m very excited about the future of that style of investing because we are starting from such a stretched position.”

Several managers who have adopted the value approach have suffered in recent years, with Mark Barnett leaving Invesco after a long period of underperformance and fund house Sanditon, co-founded by value specialist Julie Dean, closing its doors last year.

Charlie Parker, managing director at Albemarle Street Partners, agreed value investing was not “dead” and urged advisers to devote a small portion of their portfolios to value stocks.

He said: “When value goes up, it really really goes up. Your home base should be quality growth, but you need a bit of value in there because as you come out of a recession, you could be badly left behind without value stocks.

“Keep faith and keep a bit of value because when they rise, they really really rise.”

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