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What is value investing?
Value investing is a strategy targeting stocks that are cheap compared to their real worth. This concept 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 look for stocks priced below their “true” value.1
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
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Value investing targets companies that are cheap compared to similar companies.
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Value investing is backed by economic theory and real-world data and can now be easily accessed through low-cost ETFs.
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Value strategies use several 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 find companies that look inexpensive based on their fundamentals.
Looking to uncover hidden value?
The concept of value investing has been around for decades, but it previously required teams of analysts working for active managers to identify undervalued companies that could outperform the market.
Now, there's an easier way for investors to access these companies.
The iShares MSCI World ex Australia Value ETF, or IVLU.
IVLU tracks an index which aims to target developed market stocks outside Australia that are undervalued relative to their peers.
To decide if a company is undervalued, the index looks at its key financial metrics, including price to book ratio, price to forward earnings and enterprise value to cash flow from operations.
To make sure that structurally cheap sectors are not overrepresented in this ETF, iShares uses a sector neutral approach, which means investors get access to stocks across all sectors.
The iShares MSCI World ex Australia Value ETF provides easy access to an investing style that has historically outperformed the broad market over time, which investors can use as part of a strategic or a tactical equity allocation.
Find out more blackrock.com.au/ishares.
Why value investing?
Value, like all our factor investing options, has an economic basis to its historical success and why we expect it to persist going forward.
Value companies can be riskier than their counterparts, so investors can earn a premium for taking risks that others avoid. Value companies are often cheaper than their growth-focused peers. Value investing also exists because of investor biases such as overpaying for past growth.2
Value strategies focus on finding 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 cheaper. The company that has the lower valuation has higher expected returns.
Our approach to value investing
BlackRock uses multiple metrics to identify value stocks. The table below shows the three metrics that define BlackRock’s approach to value investing. By using several metrics, we aim to more consistently capture the value factor.
Price-to-Book (P/B) compares a company’s stock price to its book value (assets minus liabilities) per share. This ratio shows how much investors are willing to pay for each dollar of a company’s net assets. A high P/B ratio may indicate that a stock is expensive and could have lower expected returns, and vice versa.
Forward-Price-to-Earnings (P/E) compares a stock’s price to its expected earnings over the next 12 months. This metric helps to evaluate if a stock is a good deal based on future earnings. If two stocks cost the same, but one company is expected to earn more in the future, the one with the lower forward P/E (higher denominator) is seen as cheaper and may offer better returns. Using forward-looking metrics along with P/B can help avoid “value traps” - stocks that are cheap for a reason.
Enterprise Value to Cash Flow from Operations (EV/CFO) is another useful metric. 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 different metrics can lead to different investment experiences when it comes to value strategies. While we do not have a crystal ball to predict which metric will best capture value going forward, using both backward- and forward-looking metrics may make sense. By using several metrics, we seek to maintain a more consistent focus on the value factor.
Using value in portfolios
When seeking to capture value, investors should consider how much value exposure they want in their total portfolio, and how it is constructed.
Indexes like the MSCI World Enhanced Value Index show strong value characteristics because they have lower valuation ratios compared to the market.
In practice, an index with lower price valuations can outperform a broad value index when value stocks do well. Conversely, indexes that have additional exposure to value will tend to underperform during challenging periods.
Another thing investors should be aware of is sector exposure. Some sectors tend to look cheaper than others. A portfolio that simply buys the cheapest securities without considering sector allocations may unintentionally favour certain sectors. Historically, overweighting sectors has not generated significant long-term excess returns above the market. It’s also wise to compare companies within the same sector to have an “apples to apples” comparison.
Source: MSCI, 31 December 2024.
Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
We believe managing sector risk is crucial, and it makes sense to limit deviations. We want to find value within each sector.
The MSCI World Enhanced Value Index is sector neutral relative to its parent index and scores 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 find undervalued securities to outperform their peers. Advances in technology have given investors new ways to systematically identify undervalued stocks.
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. To avoid this, investors can opt for the hedged version to reduce currency risk.
The iShares MSCI World ex Australia Value ETF (IVLU) and iShares MSCI World ex Australia Value (AUD Hedged) ETF (IVHG) offer exposure to a diversified portfolio of stocks that look strong on multiple value metrics — leverage, valuations and earnings — and without unintended sector bets.
Source: BlackRock, MSCI.