European Value: A short-term rotation play or a long-term investment strategy?

Over the past 13 years of managing our European Value strategy, some of the most insightful views come from our clients. Based on recent interactions, the belief in a cyclical recovery is clearly apparent. The key question from our clients is not if the recovery will be sustained, but rather if they have missed the value train given the market rebound this year. With the market being a future discounting measure, the key question is if it is too late to invest in value stocks?  For us clearly, value investing is a timeless investment philosophy, but some investors need specific entry points.

Firstly, taking a long-term view, valuation dispersion between growth and value remains at all-time extreme levels. If you believe in mean reversion, and that over time the key supports for value will allow this valuation dispersion to normalise, now is the best entry point to participate in a multi-year value opportunity.

Valuation Dispersion Remains At Record Highs

Secondly, focusing on the here and now, we think it is important to differentiate between beta and alpha. In the very short-term, market narratives can drive beta direction. Investing for a quick buck can be painful. At this point, we would like to turn the attention to alpha.

We cannot predict the future, yet what we do know is that our portfolio is a well-diversified, pro-cyclical exposure that is well suited to the current economic environment. Post COVID-19 normalisation, inflation, and an uptick in bond yields should be supportive for the “value beta”. Our disciplined process of buying good businesses for less than their intrinsic value has delivered an additional layer of alpha generation which we believe will form an even greater portion of total returns in the future.