By Andreas Wosol, Head of Value at Amundi
Value Investing dates back to the 1930s, making it the longest Investment philosophy in equity investing. Despite its long existence, it is one of the most debated and misunderstood investment philosophies, and after surviving its fair share of crises and business cycles, in recent years it has been labelled as “dead”. Most of the time, people treat Value Investing as a quantitative, short-term play on macro indicators and since the pandemic, it has mirrored newsflow around Covid infections and economic re-openings. This characterisation is wrong in our view, as this short term and quantitative view on Value violates the fundamental nature of an investment philosophy that rests on the belief that Value Investing is, in the words of influential investor Benjamin Graham, an “investment operation, which upon thorough analysis promises safety of principle and an adequate return.”
Amundi has managed its European Value strategy within a disciplined fundamental investment framework since its inception in May 2008. During this time, we have experienced a variety of market cycles, some when “value” was in vogue, and some when “value” was non grata. We recognise that we can’t control market sentiment, so we focus only on the controllable – our investment process.
Our process is centred around four pillars; we only invest in viable business models, we focus on identifying the intrinsic value of that viable business, and we only invest when there is an appropriate margin of safety in the name, and this focus on intrinsic value allows us to find value opportunities in all areas of the market. The beauty of this process is that it provides the discipline to ignore market sentiment and focus on what matters over the longer term: business model fundamentals and valuation. We use market rotations and bouts of volatility to our advantage, and any time we see market irrationality we go hunting for opportunities. It is this irrationality and short-termism that gives us the chance to buy good business models at strong discounts to intrinsic value, and we are confident that this approach is timeless and independent of short-term market direction.
In recent months, investors have been caught in a “battle of the narratives”. On one side, pessimism surrounding rising infection rates of COVID-19, coupled with concerns about monetary policy stimulus withdrawal, has caused market jitters. When this narrative grabs headlines, we see the more defensive, higher-quality growth names outperforming. The other narrative in the market is a more optimistic one; the accelerated vaccine deployment globally has led to a strong economic recovery, in turn leading to increased demand and an uptick in inflation. Against this backdrop, a withdrawal of monetary stimulus could be seen in a more constructive light, showing that the economy is in a healthier position. Whichever your view, these narratives have been causing ultra-short term market rotations between growth and value, and whipsaw price impacts in the market.
It is easy to let facts get lost in the noise. Taking one step back from financial markets for a moment, and focusing on our personal lives – the reopening is real. Across Europe, many of us have enjoyed holidays this year that we were unable to in 2020, offices are reopening, our children are returning to classrooms, Friday drinks with friends are a reality once again, and translating this into economics casts some light on our view of the world. This rebound in activity within the economy will lead to a continued cyclical recovery in equity markets, and this, alongside a bounce back in inflation, would suggest that a move higher in interest rates is the logical path. Fundamentally, this should all be very supportive for Value as a style given its shorter duration and pro-cyclical characteristics.