Dead Again? Value Managers Say Their Style Is Far From Over
Fidelity's Ramona Persaud, T. Rowe Price's David Wallack, and Diamond Hill's Chuck Bath discuss the state of their investing style at the Morningstar Investment Conference.
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Linda Abu Mushrefova: Have you had to do anything differently in this current market environment as you look for a value stock?
Ramona Persaud of Fidelity Equity-Income FEQIX: Sure, yes. Over time my definition of value hasn't necessarily changed in a fundamental way, but it has evolved. It's evolved to appreciate the market's regard for free cash flow generation as the economy has become less capital intensive. If you just think about the tech sector or even the industrial sector over the last several decades with globalization, they have essentially moved manufacturing to different parts of the world. So, free cash flow generation in technology has gone up a lot. If you look at free cash flow margins of that sector, very structurally different from the past. In terms of my definition of value, 2017 and the FAANG market led to a lot of suffering for value-oriented managers, including myself. I learned to reflect deeply on the efficacy of value when the market rewards value and when it doesn't, and I've evolved my process to attune to the attractiveness of the factor in determining how much exposure I want to have.
So similar to what Chuck said, some managers might have a statistically static, I think those were your words Chuck, definition of what value is. But if you just think about disconnects between price and worth, I think you end up not quite as static. So, I've evolved my process to really think about the context. The interest-rate environment matters, which means the macro matters, and attendantly correlations and dispersions matter. And that was sort of the deep learning that I had through all of the suffering in the FAANG market. The current environment in this pandemic has reinforced that value investing is challenging in that the efficacy of the factor remains very difficult to sustain, the factor's sensitivity to its own valuation remains really high.
Mushrefova: And David, you already mentioned you haven't really changed your definition of value or your approach over time, and it's been an approach that's worked very well. So, how have you been dealing with the current environment and what are you looking for as we kind of progress through the year?
David Wallack: One of my colleagues, Heather McPherson, who helped manage this portfolio with me for 10 years, is a tennis player. And she was a ranked tennis player in college. And one of the things she says to me, and has said to me over the years is: We can only control the process, we can't control the outcome. And so markets will do what they will. I don't have a crystal ball, I've learned, and it helps me not to try to focus too much on the macro environment. That's just my personal style.
I don't feel that I can consistently have the ability to call interest rates or foreign-exchange rates, commodity prices, and so forth. So, I've always looked at companies from the bottom up and tried to determine what their value is. And at the end of the day determine how much we can lose in a downside scenario relative to how much money we can make in a good scenario. And that's always been the basis of what I do. And I try to just do that year in and year out, and let the chips fall where they may. You'll have your good years and you'll have your bad years, but hopefully over time, that approach will deliver satisfactory results.