The Changing Face of Value

Published 21-Mar-2017

The Changing Opportunity Set

When deciding to invest in a value strategy, investors need to be aware of the changing complexion of the stocks that make up value. Since the tech bubble burst in 2000, the sector and geographic makeup of the cheapest segment of the market has evolved considerably. The MSCI Europe Value Index provides a good example. As Figure 2 shows, back in 2001, the value index had a much higher proportion of its market capitalization represented by defensive sectors, such as consumer staples, health care, utilities and telecoms. In January 2001, these four sectors together comprised 33% of the market capitalization of the index. In late 2011, during the Eurozone crisis, these sectors comprised over 40% of the MSCI Europe Value Index. Today, however, as a result of a dramatic rerating, these sectors account for just 18% — close to their lowest combined share in almost two decades. While defensive sectors have seen their representation in the value opportunity set diminish materially in recent times, the share of more cyclical sectors, such as materials, industrials and financials, has been increasing. Why the change in sector makeup? During the post-financial-crisis era of central bank intervention, with the attendant impact of very low interest rates, companies with more bond-like, bankable cash flows attracted a premium valuation. The result has been a dramatic rerating of some sectors, leading to highly divergent valuations between global sectors, as well as a growing disparity in regional valuations. We believe that this dispersion presents a significant opportunity for active value investors.

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