A Spotlight on Value Strategies

Popularized nearly 90 years ago, value investing has evolved into approaches that differ in investment process and execution. As investors look to pick from a roster of active value managers in a time of the style factor’s resurgence, understanding the key differences in their methods can be insightful.

A trio of approaches

Three distinct value strategies that investors can choose from include the purchase of deeply discounted firms regardless of their quality (“deep value”), buying value firms that also tend to have sustainable business models (“quality value”) or buying inexpensive, high-quality firms that the broader market is viewing positively due to constructive micro or macro influences (“quality value with catalyst”).

We simulated these broad fundamental approaches and reviewed their performance in developed markets over the last 20-plus years.¹ Deep value held the cheapest firms but also tended to hold the most “value traps” and lowest-quality firms. In contrast, quality value was more defensive, providing a balanced mix of both inexpensive and high-quality firms. The result was a higher return with less risk, producing a less severe drawdown when compared to the deep-value approach.

The use of a catalyst is represented by the third value approach, which suggests that stocks can remain inexpensive without a spark on the horizon. We found that using analyst revisions as a catalyst generated the highest return, while also preserving the defensive characteristics of the quality-value approach.²