CEOs Using a Value-Investing Style Have Outperformed Those Who Don’t

Some chief executive officers (CEOs) have the ability to manage a company’s operations with relative dexterity but may falter when it comes to capital allocation. For the latter skill, CEOs using a value investing style may actually lead to outperformance versus those who don’t.

“I found that companies managed by CEOs who allocate company cash flows according to a value-investing style seem to outperform companies that are not managed by value investor CEOs,” wrote George Athanassakos in The Globe and Mail. “For example, between 1991 and 2018, on average, the portfolio of good asset allocator companies outperformed the portfolio of bad asset allocator companies by 33 per cent in terms of cumulative three-year returns. When buying other businesses, value investor CEOs ensure that their consolidated operating margins remained high, as opposed to other firms managed by poor asset allocator CEOs who buy businesses that bring down operating margins, either because they overpay or they’re unable to realize expected synergies. Buying businesses cheaply allows value investor CEOs to create value for their shareholders.”

“What exactly does it mean to be a good capital allocator? It means for the CEO to have the skills necessary to take the cash that the company generates and deploy it to the best value-maximizing the opportunity for the company, be it buying another company, buying back shares, paying higher dividends, reinvesting within the company and so on,” Athanassakos added. “In other words, the best CEOs are those who are good value creators, as well as good value seekers. To be a good value seeker, the CEO must be a good investor, more importantly, a value investor.”

For ETF investors looking for value plays, one ETF play that’s worth a look involves sifting through the Nasdaq to find value via the Principal Contrarian Value Index ETF (PVAL). PVAL seeks to provide investment results that closely correspond, before expenses, to the performance of the Nasdaq U.S. Contrarian Value Index (the “index”).

Under normal circumstances, the fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of companies that compose the index at the time of purchase. The index uses a quantitative model designed to identify equity securities in the Nasdaq US Large Mid Cap Index (the “parent index”) that appear to be undervalued by the market relative to their fundamental value.

Another option to consider is the American Century STOXX U.S. Quality Value ETF (VALQ). VALQ seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the iSTOXX® American Century USA Quality Value Index (the underlying index). Under normal market conditions, the fund invests at least 80% of its assets in the component securities of the underlying index. The underlying index is designed to select securities of large- and mid-capitalization companies that are undervalued or have a sustainable income.

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