The growing dominance of technology companies in US stock market indices, led by the sentiment-driven Magnificent Seven, has relegated US value stocks to a secondary role over the past decade. Nevertheless, there remain dedicated value investors who, with relentless perseverance, scour the US stock market in search of overlooked gems that can shine once again.
Unpopular, forgotten, and unloved—these are typically the types of companies that attract value investors. Some are fundamentally flawed and cheap for a reason, but others are solid companies suffering from temporary setbacks. These setbacks can be due to economic cycles, such as consumer reluctance, declining business investment, or government cutbacks. Other times, companies face litigation, fines, recalls, or changing regulations. Additionally, new developments in the market, such as the rise of artificial intelligence or advances in GLP-1 medication, can create pressure on companies perceived as losers in these new trends, particularly in sectors like food and beverage.
Fear Of Missing Out
Such developments significantly impact investor sentiment. Unrealistic pessimism and boundless optimism can severely distort investors› judgement, undermining rational investment decisions. Panic selling and FOMO (fear of missing out) are common reactions. This environment requires value investors to think independently and contrarily, resisting the emotional waves that often dominate the market.
Investors› focus on growth companies has rendered US value investors a rare breed in a challenging market. Since 2015, the Morningstar US Large-Cap Value Equity category has seen net outflows every year except 2021 and 2022. The brief rediscovery of value equities during the implosion of interest-sensitive growth stocks, prompted by the US central bank’s aggressive rate hikes, was entirely reversed in 2023. The damage is stark: an organic contraction of more than 23% in 2023, following a series of double-digit contractions from 2015 to 2020. Those who have remained steadfast are seasoned and deeply committed to their value investing principles.
The strategies highlighted by Morningstar either boast a solid management team and investment process, according to fund analysts, or are recognised by an algorithm that evaluates mutual funds based on the same criteria. This edition features a fund that meets these standards within the Morningstar Equity US Large-Cap Value category.
Brandes US Value: A Standout Fund
A group of experienced and committed value investors executing a rigorous, patient, and contrarian bottom-up process makes Brandes US Value an attractive mutual fund. It earns a People Pillar rating of High and a Process Pillar rating of Above Average, resulting in a Silver Morningstar Medalist Rating for the I Acc fund class.
Established in 1991, the strategy is managed by Brent Fredberg, Ted Kim, Kenneth Little, and Brian Matthews, who have been part of Brandes› Global Large Cap Investment Committee since 2013. With over 20 years at Brandes, their investment philosophy is deeply ingrained. Their vast experience, high stability, and significant investments in their own strategy set them apart, alongside their intensive collaboration, long-term horizons, independent thinking, and unwavering commitment to their approach.
The team, supported by 23 global sector analysts, relies on bottom-up fundamental equity research. Interaction with analysts is well-structured, and the decision-making process within the portfolio manager team fosters debate and diversity of thought, enhancing understanding and helping to avoid value traps.
Consistent approach
Brandes applies this approach consistently across all their strategies, ensuring discipline and reducing the risk of style drift. This commitment to a value-oriented, bottom-up driven, and benchmark-agnostic strategy ensures that all portfolio managers and analysts are aligned. The robust investment culture at Brandes underpins disciplined execution, exploiting behavioural biases and investor emotions to find mispriced securities. The focus on margin of safety determines position sizes, balancing risk and potential reward.
Since the formation of the Global Large Cap Investment Committee in 2013, the strategy has performed solidly relative to the Morningstar US LM Broad Value category index over various periods. This is impressive, given the strategy’s strong focus on value, which has underperformed in recent years. However, the strategy’s long-term track record shows that it is not without risks, as evidenced by its poor performance during the 2008 financial crisis. Investors must be prepared to accept higher volatility and potentially stretched returns relative to peers and the index to reap long-term rewards.
Jeffrey Schumacher is director manager research at Morningstar Benelux. Morningstar analyses and evaluates investment funds based on quantitative and qualitative research. Morningstar is an Investment Officer knowledge partners and takes an analytical look at a specific category of investment funds every Friday.