Value investing isn’t dead, but investors aren’t looking in the right places for value stocks, says Parnassus Investments’ Robert Klaber.
Klaber, who co-manages the firm’s flagship Parnassus Fund (PARNX), argues that value investing is still a viable strategy as long as investors consider the quality and sustainability of the companies they hold.
“To say that value is dead is quite an exaggeration and ridiculous,” says Klaber. “What has helped Parnassus is that we do prioritize quality companies, and we also have a growth component from our relevancy lens. We’re accessing companies that have value, plus quality, plus growth, and that helps us to mitigate the downside.”
Some market watchdogs have noted that value factor investing, which attempts to buy relatively cheap stocks in hopes of earning higher returns, has not worked very well since the global financial crisis compared to index investing and growth investing.
While the S&P 500 delivered 17.4 percent returns year to date, and the S&P Large Cap Growth Index has posted 24.1 percent returns year to date through Nov. 6, the S&P 500 Large Cap Value Index has posted only 10.1 percent returns. By comparison, PARNX has posted 11.8 percent returns in the same time period.
The S&P 500 Index has beaten the S&P 500 Value Index over one-, three-, five-, 10- and 15-year periods ending on Nov. 6, according to Morningstar. By comparison, PARNX has trailed the S&P 500 over one- and three-year periods, but has beat the S&P 500 over five- and 10-year periods ending Nov. 6.
Parnassus doesn’t have an established, one-size-fits-all method for measuring value, and in part, that flexibility allows managers like Klaber to identify value investing opportunities in unexpected places.
“Generally speaking, we tend to focus on earnings growth,” says Klaber. “Earnings growth is a good predictor for long-term growth. We tend to value companies based on the price-to-earnings ratio; that’s historically how we’ve preferred to do it. Our belief is that companies with strong earnings power and earnings growth will tend to outperform over a multi-year period.”
Parnassus’s selection strategy focuses on a company’s moat, or its resilience and competitive advantages within its area of business. In addition, Klaber considers a company’s relevancy, management and valuation.
Companies that are relevant provide services that are in-demand, or are innovators who are directly growing their market share by investing in their businesses, says Klaber. Parnassus uses a checklist to look into a firm’s long-term relevancy and to identify disruptive threats and services that might make a company’s products less relevant over the long term.