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Value managers never walk alone

Welcome to The Rec List, a weekly compilation of the best research notes, academic papers, articles and posts aimed at anyone who works in manager selection.

Value managers never walk alone

Red all over

As someone who reads a lot about investment and even more about football (by which I mean soccer, but I’m not going to call it that), I can safely say both fields are currently dominated by one ubiquitous article each.

In investment, as you likely well know, it’s ‘value is / isn’t dead’ (delete as applicable depending on what kind of funds your firm runs). In football it’s ‘Liverpool have won the league, ending a 30-year wait.’

You can honestly find a new article on these topics every day. For better or worse, I have read a lot of them.

What you won’t find many of, however, are articles that marry these two topics together, comparing the prolonged underperformance of value investing to the decades-long title drought suffered by English football’s most glorious club. Until now that it is!

Step forward Anthony Corrigan of Research Affiliates, who has dutifully taken it upon himself to pen a pan-genre odyssey charting the wilderness years of these two storied narrative (and occasionally money-making) machines.

The broad thrust of Corrigan’s post ‘Mean Reversion: Lessons from Liverpool’s 2020 Title Win’ is this: just as you can’t write off a football team even when it appears it is dead and buried, so too investors should not dismiss an asset class or style of investing, simply because it has had a long, sometimes very long, run of underperformance. He writes:

Similar to a mistake we see too often in the world of equity investing, far too many who looked at Liverpool’s recent losing past extrapolated the same performance into the future, ultimately coming to an unfair conclusion. Long dry spells are not unusual and should be expected. Indeed, many forget that Manchester United, the team that pushed Liverpool aside to dominate the English game in the 1990s and 2000s, endured its own 26-year dry spell from 1967 to 1993 without capturing a league title.We see similar trends in equity markets. Comparable to Manchester United, US small-cap equities had a dry spell of 26.7 years between 1983 and 2010. Intriguingly, low beta in the United States last peaked in the same year as Liverpool (1990) and continues to be underwater from that lofty position. Momentum investing remains underwater following its dramatic fall from grace in late 2008 (over 11 years) and high profitability is clamouring to get back to the highs it reached in 2012.Today, the strategy getting the most attention for underperformance is value given its struggles over the past 13 years in which growth has significantly outperformed. Does this mean that value strategies no longer work? The simple answer is ‘no’.

As a habitual stretcher of metaphors myself I know well just what this kind of work takes and admire the author’s dedication to the task.

Of course, the comparison is imperfect and a study of the last 30 years of English football will not give you empirical evidence of the efficacy of the value factor, but as the title of the paper suggests, there are lessons that can be drawn.

The paper starts by spending some time looking back at value and highlighting historical examples of its return to form at points when the spread between it and growth is widest, but we’ve covered this before on The Rec List, here and here, so won’t recap it now.

Instead we’ll highlight another two points the author makes: top 10 stocks and football teams change more often than people think, and there are considerable benefits to a conservative investment approach.

The first point is not new ground for Research Affiliates. In an interview with Citywire earlier this year, the firm’s founder and chairman Rob Arnott made this same argument, and the firm has written a paper on it here. It can be neatly summarized by the statistic that only one of the world’s 10 biggest firms (Microsoft) in 2001 was still in the top 10 in 2018. In the Premier League, 50% of the teams in the top 10 in 2000 are not in it today. Two of the 2000 top 10 (Leeds and Sunderland) are not even in the league and another three (Leicester City, Aston Villa and West Ham) have been relegated and returned (to the league, not necessarily the top 10) during this time.

The point about a conservative investment approach highlights that Liverpool returned to the top while avoiding lavish spending on players (or where this was done it was offset by sales) and planned for organic growth by developing youth players and training facilities. This, the paper suggests, is broadly akin to backing ‘high profitability and low investment (in other words, businesses that grow sustainably)’ over ‘empire building’ bets.

It concludes by basking for a moment in Liverpool’s victory (it’s been 30 years so this can be indulged) before noting that ‘value investors will be hoping for a similar outcome to their own storm in the not-so-distant future.’

You can read the article in full here.

Further reading:

The lunatics have taken over

Active managers are beginning to take ETFs seriously. Not as a threat: they have been doing that for years. But in terms of offering their own strategies via the vehicle.

Last week one of the biggest holdouts, Dimensional Fund Advisors, announced it would offer strategies as active ETFs for the first time, and it is far from alone in making the move. Another active giant, T. Rowe Price, has already filed for a series of ETF versions of some of its most popular mutual funds, which are set to go live later this year. Federated, which has never offered an ETF before, has just hired a Vanguard alum to oversee its move into the space, as Citywire first reported last week.

This is good news for investors who will get good strategies in a tax-efficient wrapper, likely (over time) for a lower fee, and with no barriers to access. This latter point is the focus of an article by Morningstar’s John Rekenthaler called ‘Jack Bogle was wrong about ETFs.’

The title relates to the late Bogle’s view that ETF investors were ‘fruitcakes, nut cases, and the lunatic fringe,’ which, as Rekenthaler explains, has its roots in ETFs’ birth on stock exchanges and the Vanguard doyen’s fear that ‘ETFs would transfer wealth from shareholders to the stock exchanges, as each dollar that investors wasted when making trades would flow to the exchanges’ top line.’

The article goes on to reject Bogle’s take and highlight the virtues of ETFs’ availability on exchanges, which allows them to break down distribution barriers. Initially this was a way for commission-based advisors to offer index funds, and today means that any advisor can offer these strategies regardless of any fund choice restriction on their trading platform caused by sales deals.

Most recently, as active shops begin to offer strategies via ETFs that were previously only available as funds through advisors, it means these ‘can be bought by individuals as readily as they may be owned by advisors.’ Rekenthaler writes:

This is a decidedly positive trend. From an investor’s perspective, fund companies should not prosper (or fail) because of their distribution models. What matters is how they treat their shareholders. Ironically, ETFs come closer than the mutual fund industry to fulfilling Jack Bogle’s vision. Bogle staked Vanguard’s future on the belief that, ultimately, how funds were marketed and distributed was less important than the quality of the funds. He was correct in that prediction, but not in perceiving how ETFs advanced, rather than hindered, his cause.

You can read the article in full here.

Further reading:

Quick clicks: 

 PS: We’d love to hear what you are reading, both for work and otherwise. Please email any links, thoughts, feedback and general miscellany to

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