Trends Watch: Outlook for Value Equity Investing

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Joe Gilbert, Senior Portfolio Manager, Integrity Asset Management. 

What is your outlook for value equity investing? 

Value investing has suffered relative to growth investing for the past few years.  There have been episodic moments where value has outperformed growth but those have been very ephemeral. I had hoped that with interest rates moving from the zero-bound, that interest in the longer-duration, high-multiple stocks, i.e. growth stocks, would begin to underperform.  We still believe that this will happen; however, it will not be linear.  With the prospect of interest rates not revisiting zero, the opportunity for value stocks is very appealing.

Where do you see the greatest opportunities and why?

Utilities, real estate and financial stocks which comprise a large composition of value indices will benefit from incremental interest rate cuts, so we are pretty constructive on value investing overall.  Additionally, small cap value stocks have been perennially overlooked and we believe that, with the large valuation discount to larger cap stocks along with the valuation discount between value and growth stocks, this is an asset class that is ripe for outperformance for a meaningful period of time.

What are the greatest challenges you face and why?

Short-termism is very prevalent in the market today. This is a challenge and sometimes an opportunity for longer-term investors. Quite often, stocks over- or under-react to news and our job is to look through the noise. Hedge funds and single-day option traders dominate trading so we have to look for opportunities to capitalize on short-term mispricing of stocks with solid fundamentals.  Short-term this is a challenge. Longer-term, this provides fertile opportunities to add alpha.

What keeps you up at night?

Only the paranoid survive, right, according to Andy Grove?! I always try to be cognizant of how I can be wrong. There are always things lurking around the corner, but we have to find a way to appropriately discount them and move on.  Currently, the geopolitical fragility that exists makes it is very difficult to price. Whether it is China invading Taiwan or an oil price shock or even stagflation, I am mindful of what will potentially work or not work under those scenarios.  We try to build a bullet-proof portfolio, but we balance that against being too risk-averse. It is tough to be too conservative now because the market has become inured to buying any dip and that philosophy has been rewarded – given the economic backdrop that has not been the wrong approach heretofore. The volatility around the U.S. election is a known unknown but the outcome of that has huge implications of what strategy will outperform.  However, lower valuation value stocks with strong cash flow yields and proven management teams always win.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.