The following is an excerpt from a presentation I gave this week:
The following is an excerpt from a presentation I gave this week:
Growth stocks — and specifically large-cap tech stocks led by the FAANGs — have utterly crushed value stocks of late. It’s been the dominant theme of the past five years. Even the first quarter of 2018, which saw Facebook engulfed in a privacy scandal, saw growth outperform value.
|Large-Cap Growth||S&P 500 Growth||1.58%|
|Large-Cap Stocks||S&P 500||-1.22%|
|International||MSCI EAFE Index||-2.19%|
|Utilities||S&P 500 Utilities||-3.30%|
|Large-Cap Value||S&P 500 Value||-4.16%|
|Real Estate Investment Trusts||S&P U.S. REIT Index||-9.16%|
|Master Limited Partnerships||Alerian MLP Index||-11.22|
Value stocks in general underperformed, and the cheapest of the cheap — master limited partnerships — got utterly obliterated.
So, is value investing dead?
Before you start digging its grave, consider the experience of Julian Robertson, one of the greatest money managers in history and the godfather of the modern hedge fund industry. Robertson produced an amazing track record of 32% compounded annual returns for nearly two decades in the 1980s and 1990s, crushing the S&P 500 and virtually all of his competitors. But the late 1990s tech bubble tripped him up, and he had two disappointing years in 1998 and 1999.
Facing client redemptions, Robertson opted to shut down his fund altogether. His parting words to investors are telling.
The following is the Julian Robertson’s final letter to his investors, dated March 30, 2000, written as he was in the process of shutting down Tiger Management:
In May of 1980, Thorpe McKenzie and I started the Tiger funds with total capital of $8.8 million. Eighteen years later, the $8.8 million had grown to $21 billion, an increase of over 259,000 percent. Our compound rate of return to partners during this period after all fees was 31.7 percent. No one had a better record.
Since August of 1998, the Tiger funds have stumbled badly and Tiger investors have voted strongly with their pocketbooks, understandably so. During that period, Tiger investors withdrew some $7.7 billion of funds. The result of the demise of value investing and investor withdrawals has been financial erosion, stressful to us all. And there is no real indication that a quick end is in sight.
And what do I mean by, “there is no quick end in sight?” What is “end” the end of? “End” is the end of the bear market in value stocks. It is the recognition that equities with cash-on-cash returns of 15 to 25 percent, regardless of their short-term market performance, are great investments. “End” in this case means a beginning by investors overall to put aside momentum and potential short-term gain in highly speculative stocks to take the more assured, yet still historically high returns available in out-of-favor equities.
There is a lot of talk now about the New Economy (meaning Internet, technology and telecom). Certainly, the Internet is changing the world and the advances from biotechnology will be equally amazing. Technology and telecommunications bring us opportunities none of us have dreamed of.
“Avoid the Old Economy and invest in the New and forget about price,” proclaim the pundits. And in truth, that has been the way to invest over the last eighteen months.
As you have heard me say on many occasions, the key to Tiger’s success over the years has been a steady commitment to buying the best stocks and shorting the worst. In a rational environment, this strategy functions well. But in an irrational market, where earnings and price considerations take a back seat to mouse clicks and momentum, such logic, as we have learned, does not count for much.
The current technology, Internet and telecom craze, fueled by the performance desires of investors, money managers and even financial buyers, is unwittingly creating a Ponzi pyramid destined for collapse. The tragedy is, however, that the only way to generate short-term performance in the current environment is to buy these stocks. That makes the process self-perpetuating until the pyramid eventually collapses under its own excess. [Charles here. Sound familiar? Fear of trailing the benchmark has led managers to pile into the FAANGs.]
I have great faith though that, “this, too, will pass.” We have seen manic periods like this before and I remain confident that despite the current disfavor in which it is held, value investing remains the best course. There is just too much reward in certain mundane, Old Economy stocks to ignore. This is not the first time that value stocks have taken a licking. Many of the great value investors produced terrible returns from 1970 to 1975 and from 1980 to 1981 but then they came back in spades.
The difficulty is predicting when this change will occur and in this regard, I have no advantage. What I do know is that there is no point in subjecting our investors to risk in a market which I frankly do not understand. Consequently, after thorough consideration, I have decided to return all capital to our investors, effectively bringing down the curtain on the Tiger funds. We have already largely liquefied the portfolio and plan to return assets as outlined in the attached plan.
No one wishes more than I that I had taken this course earlier. Regardless, it has been an enjoyable and rewarding 20 years. The triumphs have by no means been totally diminished by the recent setbacks. Since inception, an investment in Tiger has grown 85-fold net of fees; more than three time the average of the S&P 500 and five-and-a-half times that of the Morgan Stanley Capital International World Index. The best part by far has been the opportunity to work closely with a unique cadre of co-workers and investors.
For every minute of it, the good times and the bad, the victories and the defeats, I speak for myself and a multitude of Tiger’s past and present who thank you from the bottom of our hearts.
Charles here. The more things change, the more they stay the same. Value will have its day in the sun again, and that day is likely here with the FAANGs finally starting to break down.
Had Robertson held on a little longer, he would have been vindicated and likely would have made a killing. Consider the outperformance of value over growth in the years between the tech bust and the Great Recession:
So, don’t abandon value investing just yet. If history is any guide, it’s set to leave growth in the dust.
Tadas Viskanta continued his Blogger Wisdom series by asking “What ETF, if it were launched tomorrow, would you invest in with little (or no) hesitation? Said another way what asset class or strategy is not currently effectively available in an ETF wrapper?”
Here was my answer: “Frankly, there isn’t one. We arguably have a bubble in ETFs, indexing in general, and even in smart beta.”
I seem to be echoing the sentiments of several of the other contributors:
Robin Powell: “I’m quite happy with my family’s portfolio as it is. It would be refreshing to have a day without another ETF launch!”
Tom Brakke: “I have no idea. There are too many already. The industry machine is at work cranking them out.”
Cullen Roche: “Nothing. The ETF market is becoming saturated. Most of the new strategies are gimmicky nonsense being sold to people who think they need something they don’t.”
Michael Batnick: “Nothing. I’m content.”
I have to say though, Phil Huber’s tongue-in-cheek reply might have been my favorite:
While it may seem like there is nothing new under the sun in ETF land, there is one glaring hole when it comes to product development and that is an ETF that capitalizes on the most consistently accurate contrarian indicator known to mankind – Dennis Gartman.
The Inverse Gartman ETF (Proposed Ticker: WRNG) would provide investors a transparent, rules-based way to take the opposite bet of whatever Gartman is bullish or bearish on that week on CNBC.
Great replies, as always. To see the full list, see Finance blogger wisdom: missing ETFs
Our esteemed panel of finance bloggers weigh in today and what they have learned in the ten years since the great financial crisis. https://t.co/DFePg9xsxC image: https://t.co/BvOuXmJ5ka pic.twitter.com/tY8jVnAIMh
— Tadas Viskanta (@abnormalreturns) April 3, 2018
Continuing his annual Finance Blogger Wisdom series, Tadas Viskanta of Absolute Returns asks: Ten years have passed since the onset of the financial crisis. What about the past decade has changed your thinking about the economy, financial markets or investing?
This was my answer:
Value investing works, but applying a value strategy without some kind of momentum filter is a recipe for frustration because cheap stocks can stay cheap for a long time in the absence of a catalyst. You don’t necessarily need to know the catalyst ahead of time. Simply waiting for a cheap stock to resume some kind of modest uptrend will save you a lot of grief. This has been a decade in which growth has absolutely thrashed value.
There were some really good answers by Tadas’ collection of bloggers. To read their answers as well, see Finance blogger wisdom: ten years in
Tadas Viskanta, editor of the excellent finanical blog Abnormal Returns, asked a group of financial bloggers the following question:
Assume you are advising a pension fund, endowment or foundation. What is a reasonable long-term expectation for real returns for a well-diversified portfolio?
The answered varied, but it seems like the consensus was somewhere in the ballpark of 2%-3%, though some had estimates of 5% or better.
This was my response:
We all know the standard answer: stocks “always” return 7% to 10% per year. But while that might be true over a 20-30-year time horizon, the reality can be very different over shorter time horizons.
At today’s valuations, the S&P 500 is priced to actually lose 2%-3% per year over the next eight years. That estimate is based on historical CAPE valuations, which have limitations (including the failure to take into account differences in interest rates over time). So, let’s assume the CAPE is being unduly bearish given today’s yields and that stock returns end up being 5% better than the CAPE suggests. We’re still looking at returns of 2%-3%.
That’s roughly in line with with the yields you can achieve on a high-quality bond portfolio. So, core assets should return something in the ballpark of 2%-3% per year over the next 8-10 years. Overseas (and particularly emerging market) stocks might do significantly better than that, and commodities might enjoy a good decade starting at today’s prices. So, a diversified portfolio that included emerging-market stocks and commodities might post respectable returns. But a standard 60/40 portfolio is unlikely to return better than about 3% over the next 8-10 years.
There were some very solid, very thoughtful responses from several financial bloggers I respect and follow. To read the other answers, see Finance blogger wisdom: real returns.
Charles Sizemore is the Chief Investment Officer of Sizemore Capital Management, a registered investment advisor based in Dallas serving individual families and institutions. (Read More)
© 2018 Sizemore Financial Publishing, LLC