Our guide to quality value investing in 2023
Most seasoned investors know the difference between value investing and quality investing, but part of our philosophy is to combine these two investment strategies in our process, with the addition of a third separate criterion – hidden value, but more on that part later.
Why the comeback?
Trends ebb and flow in the investment world and while we argue that value investing should never go out of fashion, the popularity and performance of value investing has had something of a turnaround in the last few years. This isn’t simply luck. Not only does value investing tend to outperform in periods of rising inflation, but over the long-term, it has also outperformed growth investing (see figures 1.). Since Pzifer’s vaccine announcement in November 2020, value has outperformed growth by 20%. and over the past year, earnings for value stocks have performed higher than expected, driven by the success of non-cyclical stalwarts such as the financial and energy sectors, while many growth stocks have fallen short.
Figure 1.
Our take on quality value investing
Like value investing, quality value investing also involves finding stocks that are undervalued by the market relative to their intrinsic value, this type of investing also emphasises the importance of also choosing quality business.
In other words, for Mayar this boils down to finding no less than three elements present in a stock:
A great business (quality)
Housed within a great company (quality)
Available for a discount (value)
Why choosing quality companies is so important.
The reason we believe that “quality value” is preferable to simple “value” is that these types of companies have the institutional memory to not only weather economic storms, but also to use periods where others may falter as an opportunity to capture new organic growth or engage in M&A.
Sometimes the market won’t share our view on what is a quality value investment and on these occasions we are happy to take the contrarian view.
Hidden value?
There are two ways of accounting for expenditure in the accounts. Amortisation/Depreciation and Expensing. Let’s say today, you spend £100m on a factory that you expect to last 10 years. In the P&L, you don’t account for it as £100m spent today, you account for it by spreading the cost over the useful life. So for each of the next 10 years, you account for -£10m. This is because the investment in the factory should produce returns over the next 10 years, so you want some way of allocating that cost appropriately. If you spend £100m on paper clips, well, that’s just expenditure required to run the business, like salaries for example. They are expensed and the full amount accounted for in the year in which they were bought. Intangible assets are currently expensed in the way that paper clips are. So let’s say a company spends £100m on coding infrastructure. That is the modern equivalent of building a factory. Should it be recognised as a one-off expense or amortised across its useful life? Your view of the profitability of a firm depends on the answer.
This approach to accounting can result in stocks being miscategorised. Three examples of stocks which are more suited to value rather than growth indices are: Visa, Electronic Arts, and Howdens Joinery Group. Electronic Arts, for example, trades at around 4x the value of its Price to Book (P/B), even though it’s clear to our investment team that the real value is closer to 2x P/B due to the exclusion of historic R&D and sales & marketing spend which have resulted in a much larger asset base.
As we continue into 2023, it's important for investors to remain disciplined in their approach to investing. Here are a few key considerations for successful quality value investing outcomes in the coming years.
Quality value investing checklist
1. A preference for strong financials: Companies that have solid balance sheets, low debt levels and a history of consistent profitability are usually better equipped to weather economic downturns. They are also more likely to generate steady returns for investors.
2. Consider the company's economic moat: Look for companies which have a unique selling proposition or a competitive advantage that sets them apart from their peers. Companies with a strong brand, proprietary technology, or a dominant market position are often more attractive to value investors.
3. Focus on the long-term: We believe that Quality-Value investing is better-suited to a long-term strategy. Therefore it's important to resist the temptation to chase short-term market popularity or themes. Instead, focus on finding companies which have a strong track record of growth and stability, and are likely to continue performing well in the long run.
4. Diversify your portfolio: While it's important to focus on individual companies, it's also essential to ensure that your portfolio, or fund’s, risk level is tolerable and is set up to maximize potential returns. The Mayar portfolio invests in a range of sectors and industries, as well as a diverse set of countries and regions, in terms of location of listing and the source from which revenue is generated.
Overall, value investing requires patience, discipline, and a long-term perspective. For many investors, this means being disciplined enough to not continually monitor investment performance and erring away from emotional decision-making in volatile markets. By focusing on companies with strong financials, competitive advantages, and a track record of stability and growth, investors can position themselves to generate steady returns in the years ahead.
To speak to a member of the investor relations team about Mayar’s approach to value investing, please contact ir@mayarcapital.com.
FAQ section
Q: Is value investing riskier than growth?
A: At The answer is ‘it depends’. What Mayar has found over its 12-year record is that companies that meet our investment criteria tend to be less volatile and are better placed to preserve capital in down markets. This means the journey back to break even is shorter and over time, a smoother return profile can outperform the market while exhibiting lower levels of risk.
Q: Is value investing still profitable?
A: The short answer is “yes”. Many so-called growth companies aren’t always structurally profitable, so while the upside may look attractive, it’s important to properly scrutinise the underlying fundamentals of the business.
Mayar Capital’s Multi-Checklist Scoring System © anchors our research in a repeatable process which ensures that each facet of a stock, from the underlying Real Economics to the Business Risks facing the company, are considered. We describe this as introducing the quantitative to the qualitative.
Q: Which sector is best for value investing?
A: There is no one right answer for this question at all times. One sector may at times be more attractive than others for value investors. We believe that by focussing on businesses and industries, rather than equity markets and sectors, we are better positioned to uncover hidden value and identify attractive long-term investment opportunities.
Disclaimer: Investors should be aware that with investing, capital is at risk. Past performance is not necessarily a guide to the future and that the price of shares and other investments and the income that is derived from them may fall as well as rise and the amount realised may be less than the original sum invested.
The opinions expressed are not personalised advice. If you are uncertain as to the suitability of an investment for you, please consult an independent financial adviser.