WHAT IS VALUE INVESTING?

Value investing is a strategy that targets stocks that are low in price relative to their fundamentals and peers. The concept of value investing has been around for decades. In fact, Columbia University professors Benjamin Graham and David Dodd noted in their 1934 book, Security Analysis, that investors should focus on purchasing securities at prices less than their “true” value.1

girl getting haircut
girl getting haircut
  • iShares ETFs cover a broad range of asset classes, risk profiles and investment outcomes. To understand the appropriateness of this fund for your investment objective, please visit our product webpage.

    iShares ETFs cover a broad range of asset classes, risk profiles and investment outcomes. To understand the appropriateness of this fund for your investment objective, please visit our product webpage.

    Find out more about iShares MSCI World ex Australia Value ETF (IVLU)

    https://www.blackrock.com/au/products/335478/

    This product is likely to be appropriate for a consumer who is seeking capital growth, using the product for a major allocation of their portfolio or less, with a minimum investment timeframe of 5 years, with a medium to high risk/return profile.

    Find out more about iShares MSCI World ex Australia Value (AUD Hedged) ETF (IVHG)

    https://www.blackrock.com/au/products/335523/

    This product is likely to be appropriate for a consumer who is seeking capital growth, using the product for a major allocation of their portfolio or less, with a minimum investment timeframe of 5 years, with a high to very high risk/return profile.

KEY TAKEAWAYS:

  • Value investing targets companies that are low in price when compared to their peers.
  • Value investing is supported by economic theory and empirical data and can now be easily accessed through low-cost ETFs.
  • Value strategies use a combination of metrics such as Price to Book (P/B), Forward Price to Earnings (P/E), and Enterprise Value to Cash Flow from Operations (EV/CFO) to identify companies that look inexpensive relative to their fundamentals.

WHY VALUE INVESTING?

Value, like all our factor investing options, has an economic rationale for why it has existed historically and why we expect it to persist going forward. Value is the result of a reward for bearing risk that other investors are not willing to take (value companies can be riskier than their counterparts). Value companies have been shown to trade at a larger discount than their growth-focused peers. Furthermore, value investing exists due to investor behavioural biases such as overpaying for past growth.2

Value strategies specifically focus on identifying companies that may be undervalued. All else equal, if two companies generate the same profits or the same book value, we prefer to buy the one that is less expensive. The company that has the lower valuation has higher expected returns.

Video 03:20

LEARN MORE ABOUT VALUE

Dr Andrew Ang, Global Head of Factors, Sustainable Solutions and Tamara Stats, Lead ETF Specialist discuss value investing and how it can be applied in portfolios.

iSHARES VALUE ETFs

Hedged factor ETFs may be expected to have a very high level of volatility and risk. This is not a recommendation to invest in any particular hedged factor ETF.

OUR APPROACH TO VALUE INVESTING

BlackRock takes a multiple metric approach when searching for value.  The table below shows the three metrics that define BlackRock’s approach to Value investing. By relying on several metrics, we seek to maintain a more consistent exposure to the value factor.

Caption:

  

Metric Objective
Price-to-bookIdentify undervalued stocks
Forward price-to-earningsFind undervalued stocks with strong earnings on a forward-looking basis
Enterprise value to cash flow from operationsEvaluate stocks using a holistic company view (equity and debt)

Source: BlackRock, MSCI

Price-to-Book (P/B) takes the price of a single share of stock divided by the company’s book value per share and indicates what investors are willing to pay for a share of a company relative to its assets minus its liabilities. A higher price-to-book ratio relative to peers may indicate that a stock is expensive and should have a lower expected return and vice versa.

Forward-Price-to-Earnings (P/E) looks at the price per share of a stock compared to the 12-month forward earnings expectations of that stock. This metric seeks to evaluate the relative attractiveness of a company on a forward-looking basis. If two companies have the same stock price, but one has higher expected future earnings, the company with the lower forward P/E (higher denominator) may be considered inexpensive and should have the potential for higher future returns. One benefit of using a forward-looking metric in addition to P/B, is that it may help identify “value traps.” A value trap is a stock that is priced cheap for a reason.

Enterprise Value to Cash Flow from Operations (EV/CFO) is an additional metric that provides a differentiated view of a company. Enterprise Value looks at the entire firm, not just equity, by adding a company’s total debt to its market value and then subtracting out its cash.

Research by Blackrock and MSCI shows that depending on the metric used to evaluate a company’s value characteristics, an investor can have a significantly different experience. While we do not have a crystal ball to predict which metric will best capture value going forward, we think a combination of both backward- and forward-looking metrics may make sense. By using several metrics, we seek to maintain a more consistent exposure to the value factor.

USING VALUE IN PORTFOLIOS

When seeking to capture value, investors may want to be mindful of how much value exposure they want in their total portfolio, and how the value portfolio is constructed.

Value indexes such as the MSCI World Enhanced Value Index have stronger exposure to the value factor as shown by their lower relative valuation ratios compared to the market.3

In practice, an index with lower relative price valuations has the potential to outperform a broad-based value index when value stocks do well. Conversely, indexes that have additional exposure to value will tend to underperform during challenging periods.4

MSCI World Enhanced Value Index graph

Source: MSCI as of Nov. 30, 2023. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Chart description: Bar charts showing the current standing of specific value metrics on common benchmark and the MSCI World Enhanced Value Index.


Another consideration for investors to be aware of is underlying sector exposures. Some sectors are prone to look structurally cheaper than others. A portfolio that simply buys the cheapest securities without considering sector allocations may have unintended sector bets. Historically, static overweight exposures to sectors have not exhibited significant long-term excess returns above the market.5 Additionally, it may be prudent to compare companies versus peers within their sector to have an “apples to apples” comparison.

Sector weights

Sector weights graph

Source: BlackRock, 30 November 2023.


We believe sector risk is an element we can control, and that it makes sense to limit deviations. We want to find value within each sector.

The MSCI World Enhanced Value Index applies a sector neutral constraint to its parent index at each rebalance, as well as scoring companies relative to their peers in the same sector.

ETFs CAN GIVE EASY ACCESS TO VALUE INVESTING

Previously, active investment managers used teams of analysts to identify undervalued securities in an attempt to outperform their peers. Advances in technology have given investors additional ways to systematically identify stocks that appear undervalued.

Investors also need to be aware that international investing often comes with exposure to foreign currency movements, which can have a significant impact on returns. The more volatile the exchange rate between two currencies, the higher the risk and potential impact on returns. Investors wishing to reduce this volatility, can opt for the hedged version which can help minimise unintended currency bets.

The iShares MSCI World ex Australia Value ETF (IVLU) and iShares MSCI World ex Australia Value (AUD Hedged) ETF (IVHG) allow investors to gain exposure to a diversified portfolio of stocks that look strong on multiple value metrics — leverage, valuations and earnings — and without unintended sector bets.

LEARN MORE ABOUT FACTOR INVESTING