Anchor Capital’s CIO Says Value Investing Has Regained Strength This Year, Should Continue In 2023
Many a wealth management professional would claim Warren Buffett as an early influence inspiring them to take up a career in investing. This author, too, owns a copy of the 1949 value investing classic, “The Intelligent Investor,” by Benjamin Graham, who was Buffett’s mentor.
Value investing has found firm footing once again as investors who follow the style – scanning company fundamentals searching for solid companies at good valuations – found many opportunities in the uncertain markets of 2022, while growth stocks that led the equities markets for several years stumbled.
Is it time for advisors to rediscover their own inner Buffett? We caught up with Jennifer DeSisto, Chief Investment Officer at Boston-based Anchor Capital Advisors, to ask her about the value investing environment.
Anchor Capital, with $7.6 billion in assets as of Sept. 30, emphasizes value investing. Founded in 1983, the firm focuses on fundamentals-driven, bottom-up stock picking favoring lower valuations, positive cash flows, low debt levels and dividend streams.
DeSisto shared how value investing has fared in 2022, where value-based investment managers are concentrating their attention today, and how 2023 looks for this investment style.
WSR: Walk us briefly through the recent history of value investing, especially on what has happened in the value investing space in 2022. What effects have inflation, Federal Reserve policy and the 2022 equity markets had on value investing?
DeSisto: Value investing, or “revenge of the old economy,” has outperformed in 2022 relative to other parts of the market as companies with low valuations, cash flows and dividends have dominated. Years of low inflation and low interest rates, supported by accommodative government policy, helped drive valuation for growth companies to historically high levels.
Now we have high inflation, which we haven’t seen in over 20 years, and the Federal Reserve has to increase interest rates to combat inflation. Higher interest rates affect the discount rate used to value companies. Growth companies are more negatively affected by higher interest rates, which has resulted in the growth bubble popping. Investors have moved into value stocks which tend to have cash flows and dividends.
While inflation is expected to come down over time, we could be in an environment where inflation stays more elevated than we have seen in the past. Factors such as geopolitical events, shortages of commodities and onshoring of manufacturing could keep inflation higher. This also means that interest rates will probably stay higher than we have seen in the past. This helps support and provide tailwinds for value investing.
WSR: What sectors are value-based investment managers examining now? What attributes are they looking for, and what client needs do these attributes serve?
DeSisto: In this environment investment managers are looking for stocks with low valuation, strong free cash flows, higher dividend yields and lower debt levels. This leads us to value sectors, which are divided between more cyclical parts of the market and defensive parts of the market.
Investment managers like defensive parts of the market such as consumer staples and utilities as they tend to have inelastic demand and hold up better in down markets. Cyclical sectors, like industrials and financials, tend to go down in recessionary periods and market pull backs. Even within those broad sectors there are attractive subsectors like defense, aerospace and insurance.
Energy and natural resource companies also tend to be cyclical. However, due to a shortage of oil, natural gas and certain commodities, the prices for those areas remain high. The companies themselves are profitable and seeing earnings growth, which could continue for many years.
Investment managers, who avoided energy and natural resources for many years, now seem to be finding it an attractive part of the market. Energy is the only positive sector for 2022. It’s also a stock picker’s market given that even within sectors there is great variation in performance.
WSR: What’s the outlook for value investing in 2023? What should financial advisors be thinking about regarding value investing for the next year?
DeSisto: The outlook for value investing is positive for 2023 with defense as the best offense in these volatile markets. Inflation and interest rates are expected to remain higher than average for the foreseeable future, which supports the outlook and valuation of value stocks. We have seen throughout the history of the markets that a certain style of investing will continue for several years, which is what we are expecting for value investing.
There is a likelihood of a recession in 2023 given the slowing economy. Investment managers who focus on lower beta and lower volatility strategies should hold up well in down and volatile markets. However, there will be cyclical parts of the market, like energy, that could perform due to positive earnings. Managers who have diversified sector exposure and focused on attractive stock attributes should be able to benefit during this period.
Michael Madden, Contributing Editor & Research Analyst at Wealth Solutions Report, can be reached at mmadden@wealthsolutionsreport.com
