Popularized by Warren Buffet, the classic investing strategy of picking stocks with cheap book valuation has become more and more irrelevant because of central banks and the advancements of technology, Asset Management Company, AllianceBernstein, claims.
Bernstein’s head of European quantitative strategy Inigo Fraser-Jenkins, recently said: “Duration has been bid up as rates are so low. Thus, the outperformance of value might require higher interest rates, which could be structurally difficult to achieve in the foreseeable future. In this sense, one could say that QE could have stopped the mean-reversion process that usually occurs over the economic cycle.”
The rise in shares value of major tech companies are disrupting other, more traditional industries, and they have resulted in destroying the moats of these industries. Another concept that has been popularized by Buffet – moats are the advantage an older company has over new ones and which guarantee its market superiority.
Fraser-Jenkins said: “If Amazon is going to continue to destroy other parts of the retail sector, say, then why should we expect mean-reversion to still hold? We agree that this dynamic is likely behind part of the underperformance of value. Technology has disrupted industries in a way that may permanently destroy ‘moats’ that used to exist around certain industries. Most important growth assets are intangible, which in many cases are not captured in book value and retained earnings, making the usefulness of book value and earnings questionable.”
Of course, this could be just a passing phase, and after the economy stabilizes, traditional value investing could see a return.
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