The financial markets in 2020 have been the most interesting in my career, even more so than the financial crisis. In 2008-2009 we certainly had our fair share of volatility but nothing like we have seen in the past 3 months, over such a short period of time. In March we saw declines of 30% whereas April was the best month in the markets since 1987. Currently, as we near the end of May, some North American markets are within 10% of their all-time highs again. This violent movement has undoubtedly created a few victims who tried to guess where the market was going. But with everything going on, should investors consider a style change in what they are doing to try and catch the next wave?
I recently did an interview for Wealth Professional Magazine where they asked me that exact question. The reason this has become topical is because over the last ten years, value investing has really been out of favour as high growth companies, mainly tech businesses like Apple, Amazon and Facebook have led this market higher. Value investment strategies are typically defined by rules which invest in companies which are trading well below what the investor things they are actually worth. Hence the name value as the investor looks for value in places that the market doesn’t appreciate. In markets like we experienced up until 2020, many value investors were left behind because the market was trading higher than what some felt it was worth. Because of this, many value investors failed to find opportunities that they were comfortable with or didn’t invest in some of the highest growing companies over the last 10 years, meaning they underperformed the market. That all seemed to change a bit when the pandemic hit.
In March, when the market was crashing, some value investors believed that their time had finally come, and they began to poor money into companies and assets that had gone down in value. The only problem, the window of opportunity was only a few weeks long and quickly the market jumped as I mentioned above. Now it remains to be seen whether this market will eventually re-test the lows we experienced in March but for those who were able to seize the opportunity, there were quick returns to be made. So, would the smart decision have been for typical growth investors to jump on the value bandwagon? Quite the opposite, and in fact I think this market proved exactly why you shouldn’t try and make a style shift.
The problem with changing investment styles is that you often find yourself chasing returns which is exactly what style shifting is. It’s a prediction on what is going to be the best investments in the next time period and the simple fact is that nobody knows because there are too many unknowns in the equation. When someone starts chasing returns it’s very difficult to stop and what ultimately happens is that you end up missing out on the benefits of any style of investing. Time and time again I have met new potential clients who have claimed that they just don’t have any luck in the market, or whatever they invest in it seems to down and so they move on to something else. Luckily, we are most often the last stop that these families make as we show them the benefits of having a dedicated investment philosophy and staying disciplined to it. As mostly value investors, the last 10 years have been more challenging as we experienced the lack of opportunity I described above (in saying that we still performed very well in my opinion). But these trends never continue forever, and we knew our day would come and we just needed to be ready for it. I believe that it is likely we are in a market now where value investment styles will outperform again as with other value investors, if we remain patient and disciplined, we are likely to enjoy the benefits of doing so. Afterall, the best decision to make is often the most difficult one.
-Grant White, CIM®, CFP®
Grant White is a Portfolio Manager/Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Grant White who is a Portfolio Manager for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.