In the late 1970s, the wildly popular Van Halen hit “You Really Got Me” introduced a classic to a new generation, ushering in for many an exciting new sound for rock music. To my ears, it was just a remake of The Kinks’ original song from 14 years before.
If you’re around long enough, you start to see these repetitions in all walks of life.
In financial services, it’s done all the time. Investors are constantly hit with newfangled approaches to long-tried tactics and financial products. To me, these “inventions” are just old, sometimes fishy, approaches repackaged in fresh wrappings.
Rather than chase the latest purported investing innovations, investors would be better served by a return to classic value investing, with its focus on buying shares of businesses based on fundamentals.
To understand the benefits of traditional value investing, let’s first look at some of the more obvious examples of “re-packaging” I have seen in recent years.
Macro hedge funds, also known as “global macro strategies,” invest broadly in instruments like currencies, interest-rate swaps and indexes based on economic policies and capital movements globally. Except in name, these approaches barely differ from the big-picture “top-down forecasting” strategies that many mutual funds have used for decades.
Derivative protection refers to strategies designed to hedge bets, typically with a complicated basket of options derived from price changes in the underlying investment. “Portfolio insurance,” a computer-based version of the same principle, was a short-lived approach that was among the leading causes of Black Monday on October 19, 1987, a devastating crisis the world over.
Since the 1970s, commodities, swaps, and commercial real estate have helped investors step out of the traditional asset classes of stocks, bonds and cash. Somewhere along the line, however, commodities such as precious metals, hard assets and natural resources were rebranded as alternatives.
And then there’s de-risking, which echoes the “flight from equities” heralded in a 1979 BusinessWeek cover story entitled “The Death of Equities.” The number of stock-market investors dropped to historically low levels as concerns over rising interest rates, inflation and a recession pushed them away, but only temporarily.
This trend has serious consequences. Advisors and institutional fiduciaries feel their hand is being forced, that they need to delve into these new and complicated vehicles just to make it appear they’re doing something for their clients. Most of them know deep down that traditional allocations to equities are what have really helped drive asset appreciation in any meaningful way over the long term, but their businesses are on the line. However, historical evidence is unambiguous: stocks have outperformed bonds, commodities, real estate, and gold by wide margins over the long term.
Rather than repackaging old concepts in new wrappers, I advocate sticking with a timeless idea that’s never lost its luster: value investing. In stark contrast to new, untested investment approaches with short performance history, the value style has a track record of delivering positive returns. The Russell 3000 Value Index has climbed 16.4% and 7.0% over five- and 10-year periods ending June 30, 2015, respectively.[1]
In contrast, hedge funds, despite their increased popularity, have not delivered returns that kept pace with the growth in the funds’ assets under management.[2]
Understandably, even investors who are convinced of the benefits of value investing may still want some diversification of strategy and asset classes in their portfolios. For example, plan sponsors may choose to allocate to low-volatility and passive investment approaches to meet their fiduciary responsibility of honoring short-term payouts. These approaches can coexist with traditional strategies designed to generate alpha over the long term, such as value investing, so plans can pursue their long-term return targets.
Comedian George Carlin once quipped if you can nail two old things together that have never been nailed together before, someone will buy it from you. I think of that line every time I see the “new” offerings from Wall Street. So much of what’s produced and positioned as unique and different is just cobbled together from old ideas that most likely didn’t work before, and probably won’t again for any length of time.
Investors should not allow the glitz to distract them from what’s really important: building wealth through long-term investment in global businesses. Just because we hear the same familiar tune all over again doesn’t make the music any sweeter.
[1] Source: FactSet as of 6/30/2015. Past performance is not a guarantee of future results. One cannot invest directly in an index. The Russell 3000 Value Index measures the performance of the broad value segment of the U.S. equity value universe. It includes those with Russell 3000 companies with low price-to-book ratios and lower forecasted growth values.
[2] Brandes Institute, October 2014 Q&A based on an exclusive interview with Simon Lack, CFA, author of The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True (2011); http://www.brandes.com/docs/default-source/brandes-institute/the-hedge-fund-mirage-qa-simon-lack.pdf
Charles Brandes is the founder and Chairman of Brandes Investment Partners, L.P.
