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Investors have become increasingly dependent on growth and momentum strategies to generate returns over recent years, with value investing falling out of favour.
One option for those investors looking to diversify away from growth and momentum strategies is a smart beta product. These have grown hugely in recent years, in some measure piggy-backing on the growth of passives, although in our view it is questionable whether they should really be considered ‘passive’ strategies. There is now $15bn invested in the iShares S&P500 Value ETF, for example, as investors view it as an alternative to active management in a market that is believed to be efficient and hard to beat.
While there are some signs that we may be finally seeing the froth come off the growth-led market, we think investors need to be highly selective in choosing value strategies.
This is backed up by recent academic research, which points to the fact that simply buying what is cheap on a P/E or P/B basis is likely to be a losing strategy. In our view, investors therefore need to find an active manager with a sophisticated approach to identifying value opportunities if they want to beat the market over anything other than the very short term.
Investors who were hoping to use passives to gain access to value may not benefit when the market rotation does happen. The research also represents a warning against buying simplistic active strategies or buying value funds indiscriminately.
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