Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Jason Hsu from Rayliant Global Advisers.
Hello, Jason.
Jason Hsu: Hello.
Wall: So, we've just heard how value investing as a strategy has underperformed recently. Why is that?
Hsu: So, a lot of what's driven the value underperformance is that flow has gone out of value in response to the initial underperformance and we know as flow moves out of value managers or value factor strategies, that flow will push prices down, almost creating a short-term momentum that further makes value stocks underperform. So, what we're really seeing is investors' overreaction to short-term underperformance and value stocks, as a result, have actually gotten cheaper and cheaper.
Wall: I suppose then the contrarian in me will say now is the great time to buy. Will we see an uptick in value investing, or is this the wrong time in the cycle?
Hsu: So, if you look at empirical evidence, any time a style, whether it's value or anything else, has become cheaper because of recent underperformance and recent outflows, it forecasts that over the next full market cycle, let's call it five years, over the next market cycle this style is going to outperform.
So, very much looking at the data, the evidence says that likely outperformance, larger and average outperformance over the next five years. What we don't know is, is it next year immediately, or is it three years out? But I think evidence is on our side that sticking with it, perhaps even being a contrarian, like you say, and going into that style could be more successful.
Wall: So, value investors, both individuals who pick value stocks and indeed, professionals, who run value-driven portfolios, should they just be sticking to their knitting now or do you have to adapt to survive?
Hsu: So, the interesting thing is, we are built as human beings to want to adapt and react to short-term performance numbers. But the evidence and the research shows that that's mostly noise. So, if you can be a buy and hold investor, generally your outcome is much, much better than investors who want to fix a problem and fire a manager. In fact, the evidence from my research shows you'll be 200 basis points better simply being buy and hold than switching in and out of value, in and out of quality managers. So, buy and hold I think is the way to go.
Wall: And it has underperformed recently. We started our chat with that premise. Is there anything to gain by trying to understand why it's underperformed recently?
Hsu: So, really a lot of it is some random initial outperformance and underperformance perhaps due to macro environment and then much of what follows that initial spurt of underperformance is mostly market psychology, trend chasing flows, and that really is the part that you want to ignore and that really is something that if you can be a contrarian against, will make you much more successful as an investor.
Wall: And hold your nerve?
Hsu: Hold your nerve and that's the hardest thing to do.
Wall: Jason, thank you very much.
Hsu: Thank you very much.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
