Equities

Value investing in the new economy

11月 29, 2024 - 6 分鐘的閱讀時間

Daniel A. Nicholas, CFA
Client Portfolio Manager
Harris Associates

Key takeaways:

We believe U.S. economic shifts have fundamentally changed the nature of business value
Balance sheet assets now account for only 10% of a company’s intrinsic value
The S&P 500^® isn’t riskless—in fact, it’s very concentrated in the top five stocks

What has changed with value?

Decade after decade, a value approach to investing in the S&P 500^® Index has delivered outperformance. Taking long positions in stocks with low price to earnings (P/E) and shorting stocks with high P/E provided a positive return between 1950 and 2010.

Large-cap stocks with lower P/E ratios saw positive returns until the 2010s

Source: Empirical Research Partners Analysis, as of 31 August 2024. Chart shows the U.S. large-capitalization stocks relative returns of the cheapest quintile of trailing-P/E ratios by decade. Monthly data compounded to annual periods 1952 through August 2024. Equally-weighted returns. Stocks ranked across, and returns relative to, the universe.

The last 20 years have differed starkly. P/E ratios have been diverging rather than converging, with high P/E ratios increasing and low P/E ratios unchanged.

Over the past 20 years, high P/E ratios increased, but low P/E ratios haven't budged

(S&P 500 P/E ratios by decile)

Source: FactSet. Harris Associates analysis depicted December 31, 1990 through September 30, 2024. P/E ratio is last 12 months (LTM).

After the global financial crisis, central banks lowered interest rates to zero. The lower for longer interest rate environment certainly justified a portion of the higher P/E ratios. But we believe the U.S. shift to a service economy and away from a manufacturing economy fundamentally changed the nature of business value.

Back in the 1970s, if you knew the property, plant and equipment, and its book value, you knew 83% of a company’s intrinsic value. But as the economy transitioned over 50 years, the percentage of intrinsic value from tangible assets shrank. Today, assets on the balance sheet account for a mere 10% of a company’s intrinsic value. If an asset manager is simply screening for low price to book value (P/BV) or low P/E companies, they’re likely not finding a good approximation of intrinsic value.

Tangible asset percentages shrank while intangible grew

Source: Ocean Tomo. Intangible Asset Market Value Study, 2020.

Despite this, low valuation ratios are inexplicably tied to value investing. In the 1980s, the indexes bifurcated the market by style, and value began to be used as an adjective for a type of company. In the 1990s, value became known as a risk factor. Risk models added the value factor as one of its drivers of market returns after academics studied the value return premium. Smart beta strategies proliferated in the 2000s, screening for stocks trading at a low P/BV ratio and low Cape Schiller P/E ratios as a shortcut for determining value. So many definitions of value created confusion in the marketplace. Where there is confusion, we believe there is opportunity for active managers like Harris | Oakmark.

Why value now?

The indexing business has convinced asset owners that active managers take risks by deviating from the index. However, the S&P 500^®Index isn’t riskless. In fact, it is as concentrated as ever, with its top five holdings making up nearly 30% of the index, higher than levels seen in the 1950s. The top holdings are also very concentrated by industry as the Magnificent Seven are technology-oriented businesses.

Top five S&P 500® holdings' share of market capitalization

Source: National Bureau of Economic Research, Empirical Research Partners Analysis, 1950 - September 1, 2024. Top five S&P 500 holdings as of September 1, 2024, were Apple, Microsoft, Nvidia Corporation, Amazon.com and Meta Platforms Cl A.

During the first seven months of 2024, the composition of the S&P 500^® resulted in a Morningstar Raw Value-Growth (“Value-Growth”) score within range of Morningstar’s threshold for a growth portfolio, meaning the index wasn’t providing the blend exposure many may expect.

Due to what Morningstar called an “unusual market dynamic” in U.S. equities that created a growth bias in Morningstar style scores for the U.S. large-cap equity universe, however, Morningstar changed its methodology for identifying how each universe of stocks scores across the value-growth spectrum. This update to Morningstar’s methodology went into effect with data as of August 31, 2024. This calculation shift pushed the S&P 500’s Value-Growth score back to a level that Morningstar would classify as a large blend portfolio.

The S&P 500^® had a high growth score in early 2024

Source: Morningstar data from September 30, 2000 through September 30, 2024.
Morningstar’s Raw Value-Growth Score classifies individual stocks as value, core or growth. Morningstar will also assign Raw Value-Growth scores to a portfolio each time it discloses holdings, based on the asset-weighted average of underlying stock scores in the portfolio. A portfolio raw score less than 125 is considered value, greater than 175 is considered growth, and in between is considered blend.

While many view value stocks as slow growers, the Russell 1000 Value Index currently provides a similar growth rate as the S&P 500^® Index according to consensus estimates.

¹Based on one-year projected estimates.

History indicates that at today’s valuation levels, subsequent five-year annualized returns of the S&P 500^®could be lower than normal. We still believe the old saying holds: the price you pay is the value you get.

Why active value?

At Harris | Oakmark, we build portfolios that look significantly different than the index. At a time when the index is at record levels of concentration and is trading at a premium multiple, going active provides investors the opportunity to gain greater diversification at a lower valuation.

Our U.S. investment universe is not limited to companies solely in the value index. Rather, we believe any stock can qualify as a value stock as long as it is cheap versus itself, it’s growing and it’s run by a management team that knows how to grow per share value. Our 50 years in measuring intrinsic value gives us the experience to buy cheap growth rates and patiently wait to be rewarded for our conviction. Importantly, we determine intrinsic value by projecting cash flows generated from both intangible and tangible assets, not simplistic valuation multiples. This approach provides our clients with a distinct value return stream and the ability to beat the value style, whether it’s in or out of favor.

Written in November 2024

by Daniel Nicholas, Client Portfolio Manager, Harris Associates

For financial professional use only. This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Natixis Investment Managers, or any of its affiliates. The views and opinions are as of November 2024 and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.

All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided. Investing in value stocks presents the risk that value stocks may fall out of favour with investors and underperform growth stocks during given periods.

This material has been provided for information purposes only to investment service providers or other Professional Clients, Qualified or Institutional Investors and, when required by local regulation, only at their written request. This material must not be used with Retail Investors.

In the E.U.: Provided by Natixis Investment Managers International or one of its BRANCH offices listed below. Natixis Investment Managers International is a portfolio management company authorized by the Autorité des Marchés Financiers (French Financial Markets Authority - AMF) under no. GP 90-009, and a simplified joint-stock company (société par actions simplifiée - SAS) registered in the Paris Trade and Companies Register under no. 329 450 738, Registered office: 43 avenue Pierre Mendès France, 75013 Paris. Germany: Natixis Investment Managers International, Zweigniederlassung Deutschland (Registration number: HRB 129507). Registered office: Senckenberganlage 21, 60325 Frankfurt am Main. Italy: Natixis Investment Managers International Succursale Italiana (Registration number: MI-2637562). Registered office: Via Adalberto Catena, 4, 20121 Milan, Italy. Netherlands: Natixis Investment Managers International, Dutch BRANCH (Registration number: 000050438298), Registered office: Stadsplateau 7, 3521AZ Utrecht, the Netherlands. Spain: Natixis Investment Managers International S.A., Sucursal en España (Registration number: NIF W0232616C), Registered office: Serrano n°90, 6th Floor, 28006 Madrid, Spain. Luxembourg: Natixis Investment Managers International, Luxembourg BRANCH (Registration number: B283713), Registered office: 2, rue Jean Monnet, L-2180 Luxembourg, Grand Duchy of Luxembourg. Belgium: Natixis Investment Managers International, Belgian BRANCH (Registration number: 1006.931.462), Gare Maritime, Rue Picard 7, Bte 100, 1000 Bruxelles, Belgium.

In Switzerland: Provided for information purposes only by Natixis Investment Managers, Switzerland Sàrl (Registration number: CHE-114.271.882), Rue du Vieux Collège 10, 1204 Geneva, Switzerland or its representative office in Zurich, Schweizergasse 6, 8001 Zürich.

In the British Isles: Provided by Natixis Investment Managers UK Limited which is authorised and regulated by the UK Financial Conduct Authority (FCA firm reference no. 190258) - registered office: Natixis Investment Managers UK Limited, Level 4, Cannon Bridge House, 25 Dowgate Hill, London, EC4R 2YA. When permitted, the distribution of this material is intended to be made to persons as described as follows: in the United Kingdom: this material is intended to be communicated to and/or directed at investment professionals and professional investors only; in Ireland: this material is intended to be communicated to and/or directed at professional investors only; in Guernsey: this material is intended to be communicated to and/or directed at only financial services providers which hold a license from the Guernsey Financial Services Commission; in Jersey: this material is intended to be communicated to and/or directed at professional investors only; in the Isle of Man: this material is intended to be communicated to and/or directed at only financial services providers which hold a license from the Isle of Man Financial Services Authority or insurers authorised under section 8 of the Insurance Act 2008.

In the DIFC: Provided in and from the DIFC financial district by Natixis Investment Managers Middle East (DIFC BRANCH) which is regulated by the DFSA. Related financial products or services are only available to persons who have sufficient financial experience and understanding to participate in financial markets within the DIFC, and qualify as Professional Clients or Market Counterparties as defined by the DFSA. No other Person should act upon this material. Registered office: Unit L10-02, Level 10 ,ICD Brookfield Place, DIFC, PO Box 506752, Dubai, United Arab Emirates

In Japan: Provided by Natixis Investment Managers Japan Co., Ltd. Registration No.: Director-General of the Kanto Local Financial Bureau (kinsho) No.425. Content of Business: The Company conducts investment management business, investment advisory and agency business and Type II Financial Instruments Business as a Financial Instruments Business Operator.

In Taiwan: Provided by Natixis Investment Managers Securities Investment Consulting (Taipei) Co., Ltd., a Securities Investment Consulting Enterprise regulated by the Financial Supervisory Commission of the R.O.C. Registered address: 34F., No. 68, Sec. 5, Zhongxiao East Road, Xinyi Dist., Taipei City 11065, Taiwan (R.O.C.), license number 2020 FSC SICE No. 025, Tel. +886 2 8789 2788.

In Singapore: Provided by Natixis Investment Managers Singapore Limited (NIM Singapore) having office at 5 Shenton Way, #22-05/06, UIC Building, Singapore 068808 (Company Registration No. 199801044D) to distributors and qualified investors for information purpose only. NIM Singapore is regulated by the Monetary Authority of Singapore under a Capital Markets Services Licence to conduct fund management activities and is an exempt financial adviser. Mirova Division (Business Name Registration No.: 53431077W) and Ostrum Division (Business Name Registration No.: 53463468X) are part of NIM Singapore and are not separate legal entities. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Provided by Natixis Investment Managers Hong Kong Limited to professional investors for information purpose only.

In Australia: Provided by Natixis Investment Managers Australia Pty Limited (ABN 60 088 786 289) (AFSL No. 246830) and is intended for the general information of financial advisers and wholesale clients only.

In New Zealand: This document is intended for the general information of New Zealand wholesale investors only and does not constitute financial advice. This is not a regulated offer for the purposes of the Financial Markets Conduct Act 2013 (FMCA) and is only available to New Zealand investors who have certified that they meet the requirements in the FMCA for wholesale investors. Natixis Investment Managers Australia Pty Limited is not a registered financial service provider in New Zealand.

In Korea: Provided by Natixis Investment Managers Korea Limited (Registered with Financial Services Commission for General Private Collective Investment Business) to distributors and qualified investors for information purpose only.

In Colombia: Provided by Natixis Investment Managers International Oficina de Representación (Colombia) to professional clients for informational purposes only as permitted under Decree 2555 of 2010. Any products, services or investments referred to herein are rendered exclusively outside of Colombia. This material does not constitute a public offering in Colombia and is addressed to less than 100 specifically identified investors.

In Latin America: Provided by Natixis Investment Managers International.

In Chile: Esta oferta privada se inicia el día de la fecha de la presente comunicación. La presente oferta se acoge a la Norma de Carácter General N° 336 de la Superintendencia de Valores y Seguros de Chile. La presente oferta versa sobre valores no inscritos en el Registro de Valores o en el Registro de Valores Extranjeros que lleva la Superintendencia de Valores y Seguros, por lo que los valores sobre los cuales ésta versa, no están sujetos a su fiscalización. Que por tratarse de valores no inscritos, no existe la obligación por parte del emisor de entregar en Chile información pública respecto de estos valores. Estos valores no podrán ser objeto de oferta pública mientras no sean inscritos en el Registro de Valores correspondiente.

In Mexico: Provided by Natixis IM Mexico, S. de R.L. de C.V., which is not a regulated financial entity, securities intermediary, or an investment manager in terms of the Mexican Securities Market Law (Ley del Mercado de Valores) and is not registered with the Comisión Nacional Bancaria y de Valores (CNBV) or any other Mexican authority. Any products, services or investments referred to herein that require authorization or license are rendered exclusively outside of Mexico. While shares of certain ETFs may be listed in the Sistema Internacional de Cotizaciones (SIC), such listing does not represent a public offering of securities in Mexico, and therefore the accuracy of this information has not been confirmed by the CNBV. Natixis Investment Managers is an entity organized under the laws of France and is not authorized by or registered with the CNBV or any other Mexican authority. Any reference contained herein to “Investment Managers” is made to Natixis Investment Managers and/or any of its investment management subsidiaries, which are also not authorized by or registered with the CNBV or any other Mexican authority.

In Uruguay: Provided by Natixis IM Uruguay S.A. Office: San Lucar 1491, Montevideo, Uruguay, CP 11500. The sale or offer of any units of a fund qualifies as a private placement pursuant to section 2 of Uruguayan law 18,627.

In Brazil: Provided to a specific identified investment professional for information purposes only by Natixis Investment Managers International. This communication cannot be distributed other than to the identified addressee. Further, this communication should not be construed as a public offer of any securities or any related financial instruments. Natixis Investment Managers International is a portfolio management company authorized by the Autorité des Marchés Financiers (French Financial Markets Authority - AMF) under no. GP 90-009, and a simplified joint-stock company (société par actions simplifiée - SAS) registered in the Paris Trade and Companies Register under no. 329 450 738. Registered office: 43 avenue Pierre Mendès France, 75013 Paris.

The above referenced entities are business development units of Natixis Investment Managers, the holding company of a diverse line-up of specialised investment management and distribution entities worldwide. The investment management subsidiaries of Natixis Investment Managers conduct any regulated activities only in and from the jurisdictions in which they are licensed or authorized. Their services and the products they manage are not available to all investors in all jurisdictions.

Although Natixis Investment Managers believes the information provided in this material to be reliable, including that from third party sources, it does not guarantee the accuracy, adequacy, or completeness of such information.

The provision of this material and/or reference to specific securities, sectors, or markets within this material does not constitute investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of any regulated financial activity. Investors should consider the investment objectives, risks and expenses of any investment carefully before investing. The analyses, opinions, and certain of the investment themes and processes referenced herein represent the views of the individual(s) as of the date indicated. These, as well as the portfolio holdings and characteristics shown, are subject to change and cannot be construed as having any contractual value. There can be no assurance that developments will transpire as may be forecasted in this material. The analyses and opinions expressed by external third parties are independent and does not necessarily reflect those of Natixis Investment Managers. Any past performance information presented is not indicative of future performance.

This material may not be distributed, published, or reproduced, in whole or in part.

All amounts shown are expressed in USD unless otherwise indicated.