Nov 08

Does Value offer much Value? … this is a discussion on equities performance

Source: MorningstarDirect

The above chart shows the performance of the MSCI Australia Value index versus the MSCI Australia Growth index over the last 12 months (in fact through to close of trading yesterday). There’s obviously a hug divergence in performance as the Value index has returned more than 21% whilst the Growth index has barely produced a positive return at all. Who says the Australian sharemarket is all the same?

Anyway, that is one huge divergence in performance and is primarily as a result of a chase for dividend yield in the face of historically low bond yields. The Value index is dominated by lower PE, P/Book, and higher dividend paying stocks like Telstra and the Banks. There’s definitely a slowdown in growth from China that has put downward pressure on the Growth index (which would have a reasonable resources exposure), but the question for me, is how much further can this chase for yield go? Whilst I don’t believe interest rates are going up, and I do believe high yielding investments will be in demand for some time yet, I have to admit to being a little concerned that the success of the Value index (and associated Value/Equity Income managers…Investors Mutual, Lazard, and pretty much all Equity Income strategies (Merlon, Antares Dividend Builder etc)) may well be struggling to find real value in the months to come.

So my warning to investors and advisers is to be wary of the value and equity income manager whose success has been on the back of significant demand for high dividend paying stocks. Don’t expect that premium to continue over the next few years…sure it might…and high dividends will definitely be in demand…but beware the changing shape of what represents “value”.

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