The pronounced underperformance of value equities over the past several years has caused some clients to question if there is still a strategic, long-term case for non-U.S. value allocations. For any asset allocator to fully appreciate why value should have a place in portfolios, it is important to differentiate between some of the more traditional and simplistic definitions of value, and a more holistic approach to value which we feel is more appropriate.
Growth has outperformed value for the better part of the last decade. In early September of this year, we witnessed one of the most abrupt momentum to value reversals in equity market leadership in the past 30 years. Will this mark the beginning of a shift in leadership?
Even after a five year run up in the U.S. equity markets, many investors still have ample memories of the financial crisis of 2008. Investors are uncertain of where to invest that will offer some protection against market volatility and also mitigate drawdown risk. As a result, “liquid alternatives” have seen tremendous asset flows.
Many investors are convinced that alpha has disappeared from U.S. equity markets and prefer to use passive investment tools such as exchange traded funds (ETFs) to broadly gain exposure to these markets. The problem with this approach is that it gives up any chance of outperformance and forces an investor to settle for benchmark returns minus fees.
For the past few years, the passive versus active debate has been characterized as a pitched battle between two sides. Upon closer inspection, however, some might recognize that this ongoing argument is far more nuanced than it appears at first blush and actually involves multiple sides with somewhat vague allegiances.
A search on LexisNexis, scanning just the past 12 months, will return well over 3,000 news articles, all focused on the active-versus-passive debate that has come to define today's investment landscape. The arguments are all pretty much the same, with proponents of passive strategies keying in on the themes of lower costs and comparable performance, while those defending active strategies will underscore the value of a hands-on approach in a sideways or downward moving market.
In 1992, Morningstar introduced the Style Box™, the now-pervasive nine-square grid that visually depicts the investment style of mutual funds. The goal of the Style Box™ is to aid institutional investors seeking to categorize strategies to meet specific asset-allocation targets.
Todd Hawthorne, Lead Portfolio Manager of the Boston Partners' Redwood Strategy, highlights how investors can capture volatility-derived alpha through an alternative strategy that pairs the construct of equity buy/writes with fundamental, bottom-up analysis.
Among public equities, actively managed micro-cap value strategies have traditionally served as a destination for investors seeking attractive risk-adjusted returns. When looking at long-term performance, however, historic trends suggest that micro-cap stocks may actually be better compared to private equity investments.
One of the key decisions that U.S. managers of international stock portfolios face is whether to actively manage currency risk. Those who opt to hedge—typically through derivatives, such as foreign currency forwards—convert the value of shares from the local currencies of overseas markets back to U.S. dollars.