Pure Value Capital 2Q17 CommentaryVW Staff
Pure Value Capital commentary for the second quarter ended June 30, 2017.
With this update we’re pleased to inform you about the rebalancing of Pure Value Capital’s equity portfolio at the beginning of Q3. A key characteristic of our investment strategy is its focus on historically cheap and/or inexpensive markets and industries. Over the previous years – mainly driven by expansionary monetary policies conducted by the major central banks – many equity markets around the world have reached lofty valuation levels.
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In Figure 1 - based on our valuation metric - the most expensive countries are indicated in dark blue; the cheapest countries are highlighted in light blue. Our analysis shows that valuation levels are extremely stretched in China, Switzerland, the US and the UK, among some other markets. From a relative point of view the analysis indicates that more attractive valuations can be found in (Eastern) Europe, Asia and some emerging markets.
Source: Pure Value Capital
As a consequence, US equity positions were significantly reduced at the beginning of Q3. Freed up investments were shifted towards Europe, Asia and emerging markets (Brazil and Russia). These alterations imply that at the moment approximately 54%, 23% and 20% of the fund’s portfolio is invested in Asia, Europe and the emerging world respectively.
Our valuation-based approach offers us the flexibility to deviate significantly from the major global indices and to reach opportunistically for value wherever value can be found. We believe that the current bias keeps our investors from disappointing long-term returns from major overvalued markets and in addition it will support our ultimate goal of compounding capital for the long term.
Over the first nine months the net asset value of our fund increased by 10.90%.
During the second quarter of 2017 the Net Asset Value of the fund decreased to 110.90, implying a slight decline of 1.47% over the period March - June 2017. The price-to-book ratio of the model portfolio increased from 0.85 at the end of March to 0.89 at the end of June 2017. In light of the high valuations of the US stock market, US equity positions were significantly reduced at the beginning of Q3. Freed up investment funds were shifted towards Europe, Asia (Japan, South Korea and Hong Kong) and emerging markets (Brazil and Russia).
In a recent interview Robert Shiller noted that based on one valuation metric - i.e. the cyclically-adjusted price-to-earnings ratio - the US stock market is at an unusually high level. This price-to-earnings ratio takes into account the average earnings of the S&P500 over the past ten years. There have only been two points in time when the valuation of the US market was higher compared to today - 1929 and 2000.
Based on our own valuation metric we confirm his conclusions. For approximately twenty countries in the world we assess current valuations from a historical perspective. This analysis results in a valuation percentile for each country. The valuation percentile reflects the relative cheapness or expensiveness of a specific country at the current time. The results of this analysis at the beginning of Q3 are shown in Figure 1. Currently Russia is the cheapest market and Switzerland is the most expensive market among the markets analyzed. For the US market our metric gives a valuation percentile of 89%, both in terms of equally-weighted and value-weighted valuations.
Figure 2 shows a comparison between the valuation percentiles of 2007 - before the onset of the Global Financial Crisis - and the beginning of Q3 of 2017. It is apparent that the valuation levels of some important stock markets are now (significantly) higher compared to 2007. This is notably the case for the US, UK, Swiss and German stock markets.
In value-weighted terms - given the large weight of the US market in global indices - global valuations are definitely higher compared to the period just before the onset of the Global Financial Crisis. In equally-weighted terms - taking the simple average of all markets shown in the graph on Page 2 - global valuations are slightly lower than in 2007. In Table 1 we provide some more detail on the US stock market and show for four traditional valuation metrics the comparison between Q4 2007 and Q3 2017, both in terms of equally-weighted (ew) and value-weighted (vw) valuations. On three out of the four valuation metrics, current valuations are (significantly) higher than in 2007.
Since we always act upon valuations, at the beginning of the third quarter the portfolio was reoriented towards - from a valuation point of view - more attractive markets and industries. In line with the conclusion drawn by Robert Shiller in the aforementioned interview we significantly reduced our US equity positions in favour of European, Asian and emerging markets. With this continuous focus on valuations Pure Value Capital gives investors the opportunity to invest in common stocks “soundly, conservatively and with a minimum of excitement and regrets.” Contact us for further information.
Steven De Klerck & Christophe De Wit
Founders Pure Value Capital
Pure Value Capital Fund S.C.A., SICAV - SIF A Cap - Quarterly Factsheet 30 June 2017