The decade-long bull run put growth in the driver’s seat for the most part, but in the pandemic-riddled market these days, value investing can work. However, like the right coach with the right player in sports, a value strategy takes the right investor.
First of all, investors looking for value plays must first understand what makes a company valuable. Whether it’s the product or service itself or its price-to-value ratio, investors will have to do their homework.
“These attributes are simple and time-tested over centuries,” said market veteran and ASK Group executive director Bharat Shah. “They include choosing quality businesses that have a large size of opportunities, can compound and give predictable growth in the long term. One must also ensure sufficient margin of safety.”
“That’s what investing is all about,” Shah added.
Next, investors must look at their own time horizon. Bharat suggests that a 3- to 5-year timeframe would be ideal for value strategies. That alone won’t work as the investor must also have patience.
“If an investor has a 3-5 year view and capital to invest, good balance of mind, knowing well that things can go worse if he can live with the stress, and select quality well, this is a fantastic time to invest,” Bharat said.
Will a mass movement away from growth into more quality, safe investments predicated on value be on the way in a post-coronavirus market? From a relative value ETF standpoint, this could put value over growth equities and defensive over cyclical equities in play—particularly, the Direxion Russell 1000 Value Over Growth ETF (NYSEArca: RWVG)
RWVG seeks investment results that track the Russell 1000® Value/Growth 150/50 Net Spread Index. The fund, under normal circumstances, invests at least 80% of its net assets in securities that comprise the Long Component of the index or shares of ETFs on the Long Component of the index.
The index measures the performance of a portfolio that has 150% long exposure to the Russell 1000® Value Index (the “Long Component”) and 50% short exposure to the Russell 1000® Growth Index (the “Short Component”). On a monthly basis, the Index will rebalance such that the weight of the Long Component is equal to 150% and the weight of the Short Component is equal to 50% of the Index value.
On the other hand, Investors looking to play further strength in growth equities can start with the Direxion Russell 1000 Value Over Growth ETF (NYSEArca: RWGV). RWGV measures the performance of a portfolio that has 150% long exposure to the Russell 1000® Growth Index (the “Long Component”) and 50% short exposure to the Russell 1000® Value Index (the “Short Component”). On a monthly basis, the Index will rebalance such that the weight of the Long Component is equal to 150% and the weight of the Short Component is equal to 50% of the Index value.
For more relative market trends, visit our Relative Value Channel.