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    Value Investing

    Following up on a study in the outperformance of value stocks called Contrarian Investment, Extrapolation and Risk, US value biased fund manager, Brandes recently produced a report titled Value vs. Glamour revisited.

    The study first looked to dissect a portfolio of shares between those with high price to book ratios and those with low price to book ratios. The price to book is a measure which broadly provides an indication of value.

    With a universe of US shares, after eliminating the smallest 50%, they divided this into 10 deciles, with decile 1 having the highest price to book ratios and decile 10 the lowest price to book ratios. The result is 2 portfolios – decile 1 the glamour portfolio and decile 10 the deep value portfolio.

    Next they looked at the relationship between the valuations differential and the subsequent 5 year returns. This differential was taken by dividing the price to book for decile 1 by price to book for decile 10.

    The study started in April 1968 and the subsequent 5 year performance for each portfolio was monitored.

    This process was then repeated starting year a year later. Again the value differential between the two portfolios monitored and the subsequent 5 year outperformance monitored.


    • The medium differential in price to book was 11,1 times.
    • In February 2009 this ratio was over 20 times. i.e. the most expensive shares compared to the least expensive shares as determined using price to book was at a factor of 20 times.
    • In April 2009 value shares at a median price to book ratio of 0,5 while glamour shares had a price to book ratio of 7,69. Dividing the 1 by the other gives a ratio of 15,38 times.
    • In February 2000, when glamour shares were exceptionally expensive, this ratio reached a peak of 81,1 indicating that glamour shares were more than 80 times more expensive than value shares.
    • From that point, value shares outperformed glamour shares by a massive 50,6% annualised over the next 5 years.

    Source : Brandes Institute


    • Most of the time over a 5 year period value shares – as defined with low price to book ratios – outperform glamour shares.

    • At points where there is a greater disparity in valuation between value and glamour shares, there is a high probability that the subsequent 5 year outperformance of value shares increases.

    The rerating in shares in 2009 saw growth shares re-rate up as investors became less risk averse. The same is not necessarily true of value shares. Over time, but especially in times when glamour or growth is expensive, investors want to be positioned in value.

    Have a great weekend

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2009-09-25, 17:02:10, by ian Email , Leave a comment
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