Investor Corner/The asset classes/Factor Investing and ESG
2.6.2 Value Factor
The value factor involves buying stocks that appear cheap relative to their fundamentals, such as low price-to-earnings or low price-to-book ratios. It has worked over long periods but can underperform for years during growth-dominated markets.
The underlying logic
Value investing rests on the idea that markets periodically overreact, both to bad news, pushing some fundamentally sound companies to unreasonably cheap prices, and to good news, pushing some popular companies to unreasonably expensive ones. A value strategy systematically buys the former and generally avoids the latter, betting that prices eventually correct toward something closer to underlying fundamentals.
Why it has periods of real struggle
During periods when growth and momentum are strongly favoured by the broader market, often coinciding with low interest rates and high optimism about future earnings, value stocks can underperform meaningfully and for a genuinely extended period, sometimes lasting the better part of a decade before value leadership eventually reasserts itself.
How to hold a value tilt sensibly
A value tilt is best approached as a long-term structural allocation held through a full market cycle, not as a short-term tactical bet to be abandoned the moment it underperforms for a year or two, since that underperformance has historically been a normal, expected part of how the factor plays out over time.
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