Cast your mind back to 1980. Australia’s Alan Jones was crowned Formula 1 World Champion, and Bjorn Borg and Jimmy Connors slugged it out for the No 1 slot in the men’s world tennis rankings. Richmond won the VFL grand final, and in NSW the Bulldogs won the rugby league premiership.
The Empire Strikes Back and Nine to Five were among the top-grossing movies, while Blondie (Call Me) and Pink Floyd (Another Brick In the Wall Part 2) topped the Billboard charts.
At this time, pre-internet, it could take two or even three months for the annual report of a listed company in Europe to make it to the US.
Today the transmission of information is as good as instantaneous, and Bernard Horn, principal and founder of the Boston-based fund manager Polaris Capital Management, says access to large volumes of good information, quickly, is critical to the efficient operation of a value manager whose value proposition is an ability to identify listed companies whose current share price is below the intrinsic value of the business.
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Horn started out as a value manager in 1980. Then, the idea was relatively novel.
Today, Australian investors have the choice of a wide range of products built on a value-based approach to global equity investment, offered by fund managers ranging in size from boutiques to some of the country’s and the world’s largest institutions.
Style guide
Value management differs from another major style category, namely “growth”. Data produced by the research firm Morningstar shows that largecap Australian value managers have outperformed growth managers and managers who use a blend of styles in the one-, three-, and five-year periods ending December 31, 2014. It might be tempting to conclude from this data that a value style is best in all market conditions; but the Morningstar chart shows value managers lagged behind growth managers, even if only slightly, for the 10 years to December 31, 2014.
Tim Murphy, director of manager research at Morningstar, says the research house does not favour one style over another, and he says there is “no house view on whether value is better than growth, or anything like that”.
“We wouldn’t say we expect value to outperform growth over a full cycle,” he says.
“There’s merit in a value style, and there’s merit in a growth style.” Murphy says the key is that the managers remain true to label, and that they implement their style efficiently. Morningstar runs what amounts to a “style check” on managers, by examining each of the equity holdings in the manager’s portfolio.
It assesses them based on a range of accepted “value” criteria – including price-to-earnings ratio, price-to-sales and dividend yield – and a range of “growth” criteria as well, to ensure the implementation of the manager’s style is as it says it will be. “Each individual stock gets a ‘style’ score and then for the funds we aggregate those individual stock style scores, weighted in the portfolio,” Murphy says.
“That is to assess what [a manager] is doing versus what they say they are doing. That’s how we look at style, as it pertains to equity managers.”
