Redefining “value” for a modern economy

Wellington
By October 9, 2020 15:06

Redefining “value” for a modern economy

Our key conclusions include the following:

  • We believe there is a value premium driven by market participant behavior and that, despite all the headlines, value investing is not dead. But not all value is “cheap” (and not all growth is “expensive”) when considered in the context of the current unprecedented dispersion in fundamentals.
  • When evaluating relative valuations based on multiples, it’s important to consider whether they may be explained by obvious differences in profitability, growth, or risk between value and growth stocks.
  • A DCF-based measure, particularly one that uses underlying financial data that capitalizes R&D, can be an important part of the valuation tool kit. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. Gregg Thomas, CFA Director of Investment Strategy Tom Simon, CFA Portfolio Manager Matt Kyller, CFA Research Manager Greg Williamson, CFA Investment Strategy Analyst About the authors The members of the Fundamental Factor Team manage multi-factor portfolios, conduct market and manager research, and partner with clients on factorbased investment solutions, including strategies to pursue customized risk and alpha objectives. FOR PROFESSIONAL OR INSTITUTIONAL INVESTORS ONLY September 2020 2 Wellington Management 530541_3
  • Despite their limitations, price-to-earnings (P/E) and price-to-book (P/B) ratios still have a role to play in the evaluation of managers and factors. They remain an important part of the factor mosaic for meanreversion behavior, and the more lenses, the better.
  • Moving forward, we would keep watch on high-growth areas of the market and how they could be impacted by competition, regulation, higher interest rates, or the broadening out of economic growth. These issues will evolve over time, though we do not expect significant changes in the shorter term.
  • In evaluating managers and factors, we currently favor those with strong DCF value characteristics.
Wellington
By October 9, 2020 15:06

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