The Quality Value Trend: Putting its 'Distressed' Reputation to Rest

 

Good value doesn’t have to mean bad quality, according to Marco Pirondini, Head of Equities, and Craig Sterling, Head of Equity Research, especially when you have the patience to dig a little deeper.

There is a misperception that value is full of distressed firms. But, we estimate nearly half of the large-cap value index is comprised of companies with relatively stable and/or defensive characteristics that are also deemed ‘structural winners’.

Additionally, we believe mega cap banks, industrials and utilities are set to benefit from their respective investments in tech over recent years, and could lead the technological transformation. For more on this, click here. As such, nearly three-quarters of the large-cap value index is not distressed or deep value.

Many of the firms we categorize as stable or defensive are scale industry players that we believe will accrue similar technology benefits to market share and operating margins as we see for financials and industrials. Industries include media and entertainment, mass/discount and home improvement retail, quick-service restaurants, asset management, industrial gasses and the payments sector.

Distressed still exists

Active management with an emphasis on the quality and sustainability of business models is important as investors attempt to avoid deep, distressed value, where the existential risks reside.

These include mall-based retail with no plausible e-commerce strategy, secularly challenged regional banks, energy, tobacco, airlines, office and mall REITs.

Source: Amundi. Estimates based on companies with relatively stable and/or defensive characteristics also considered structurally sound. Includes scale industry players that are expected to accrue similar technology benefits to market share and operating margins as we see for financials and industrials. 

 

Why investors question value

We believe the more recent periods in which growth has massively outperformed value have been an anomaly. While the recent past may be fresh in one’s mind, putting it in the proper context could help keep it from having an undue influence on investment decisions. 

Recency bias – when people extrapolate a current trend well into the future – is one of the most powerful biases in finance. Human psychology weighs recent events and observations more heavily than those in the past. This is a version of the availability heuristic whereby people tend to base their thinking disproportionately on whatever comes most easily to mind. 

In an investment context, this can be dangerous because people tend to give more credence to recent investment performance, current events, and new information, disregarding many of the facts, valuations, and the long-term picture. This is not an academic or theoretical argument; recency bias can often lead investors to make poor investment decisions that can erode earning potential by tempting themselves to hold on to what has worked for too long, and/or to sell too soon.

While recency bias can lead to a systematic exaggeration in any direction, it is clear to us that right now the aggregate market participants have created a powerful investable anomaly for value over growth. We believe conditions are building for a rotation towards value, thanks to rebounding growth and rising bond yields in the wake of massive fiscal stimulus and ultra-accommodative monetary policy.

An outmoded view that value can mean the same as ‘distressed’ may prevent investors from identifying this trend. But there are six characteristics supporting the trend to US value, which could help them make more informed decisions.

Unless otherwise stated, all information contained in this document is from Amundi Asset Management S.A.S. and is as of 4 March 2021. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi Asset Management S.A.S. and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results.