In his latest Q1 2021 Earnings Call, Rich Pzena explained why this is beginning of a long pro-value cycle. Here’s an excerpt from the call:
Last quarter in these remarks, I observed the clients were asking us what are the fourth quarter’s big value run. Was the start of a cycle or just another hedge-stake in the decade long run for growth? Now after two consecutive quarters for value outperformance we’re being asked, did I miss the value cycle? Is it over? Needless to say, short term thinking still dominates. So permit me to go out on a limb.
I believe this is the beginning of the value cycle. I believe this cycle has a good chance of being long. And I believe we are still in the cycles very early days. Asset management has been defined as the practice of taking imperfect and incomplete information about the present and using it to make projections about the future.
In other words, I know that I don’t really know the future with certainty. However, for the past year, we have been saying that the signs of a broke pro value cycle would appear in one or more of the following four ways. First, a recession would be recognized. The COVID induced recession was clear to all and looking at the data from the past 14 recessions in the US over the last century. We see that in five years following the start of recessions, value strategies outperformed the broad market by an average of 530 basis points per year.
Second, interest rates would stop falling. Most of the developed world they have already stopped falling. And the tightening of the labor markets that we see as we talk with companies reinforces our expectations, but they are unlikely to reverse and start falling again.
Third, growth expectations for the high fliers would slow. And while this hasn’t clearly happened, consider this. Wall Street analysts’ consensus earnings growth estimates for a portfolio of deep value stocks over the next two years is around 23% a year versus 17% a year for the Russell 1000 growth Index. And you can buy the deep value stocks for 11x these forward earnings versus 27x for the growth stock portfolio.
Finally, the incumbents would not be destroyed by the disruptive. And I would point to electric vehicle news from the incumbents to reinforce that all of the market is unlikely to shift to the new entrants. Over the past 50 years, Pro value periods in the market have lasted on average 62 months and generated 138 percentage points of excess returns.
This compares with six months and approximately 39 percentage points so far in this cycle. Further, the depth of prior anti value cycles appears to be correlated to the length of the pro value cycle. Needless to say, following the deepest and longest anti value cycle on record, we’re optimistic about the opportunity for a long pro value cycle ahead.
You can read the transcript of the entire earnings call here:
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