Value Stock Funds Are Lacking ValueAdvisor Perspectives
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
As I will show you, the term “value” has been grossly misapplied in recent years.
Proctor & Gamble (PG) is a conservative and highly regarded consumer staples company with a 180-year track record. It produces many globally admired consumer brands, some of which are shown below.
Does being a great company with financially conservative values make PG a value stock? Most large-cap-value stock funds hold a sizeable stake in PG. Based solely on their holdings, it is tempting to claim PG is a value stock.
PG trades at key valuation ratios (P/E, P/B, and P/S) greater than the S&P 500. PG’s annualized revenue and earnings growth rates are 3.7% and 4.3%, respectively, over the last five years. Over the same period, the S&P 500 Index has grown revenue and earnings at more than double PG’s rate.
Per the gurus of value, Benjamin Graham and David Dodd, a stock should have good prospects and low valuations ratios to be classified as value. They believed investors should buy stocks with undervalued assets and that those assets, in time, would appreciate to fair value.
PG has overvalued assets and weaker-than-market growth prospects. Why is PG considered a value stock by most investors and a top 10 holding in many value funds?
Whether or not PG is a value stock is irrelevant. What is relevant is whether “value investors” using value stock mutual funds and ETFs own what they think they are buying.
Passive investing distorts value
In 2016, I wrote Passive Negligence, the first in a series of articles comparing active and passive investment management styles and the effects passive investing has on markets.
Per the article:
Passive index strategies are all the rage. Investors desperate for “acceptable” returns are investing in funds whose value is directly linked to stock market indices. Unlike active funds, indexed funds do not perform investment analysis and are not looking for sectors or companies that offer greater return potential than the market. They do one thing, and that is replicate a particular equity index.
True active investors seek individual stocks that meet qualifications they deem as valuable.
Passive investors rely on indexes, funds, and ETFs to do the research for them. I caution investors who only check to see whether the word “value” is in a fund’s name.
Read the full article here by Michael Lebowitz, Advisor Perspectives