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18 Jun

Is Value Really Ever A Value?

Posted in Markets on 18.06.13

ivreav“The move to indexing and near indexing continues to be an underlying theme,” says David Bullock, senior consultant for Eager Advisory. “The other theme of the study is that people are comfortable with value investing and the portion of their portfolio … in value will stay about the same.”

Roughly 86% of the 321 plan sponsors polled by Eager Advisory hold value investments in their portfolios. The total average allocation to value, currently at 31%, will make a minimal drop to 30% by 2001, according to the survey, which was compiled in late July.

While the total percentages won’t change much, the study shows that value managers will have ample opportunity to hold onto and earn new business. Sixty-one percent of value investors plan to maintain their allocations, 16% plan to increase their holdings, and 22% anticipate decreasing their value allocations. (Numbers may not equal 100% because of rounding.)

Plan sponsors are holding onto their value assets for several reasons, Bullock says. Managers are communicating with their clients during down cycles and trying to minimize style drift.

The survey revealed that 78% of plan sponsors with value investments still believe that the value style serves a purpose in their portfolio. An even larger number, 89%, feel they understand their value manager’s investment approach.

“I think the upswing certainly muted the grumblings,” says Terry Dennison, a principal at Mercer Investment Consulting, Atlanta, which is Eager Advisory’s parent company. “But my sense is that most plan sponsors are looking at style strategically, and they have a portfolio structuring process that says, we want to be diversified to style as well as market cap and geographically.”‘

In the end, he says, plan sponsors don’t just diversify to increase their holdings, they do so to ride out every possible type of market. So they understand and actually expect cycles of low performance.

Holding the Course

Not drifting from investment style is an important aspect of maintaining a diverse allocation, Bullock says, and that is why a majority of plan sponsors say that they expect managers not to deviate, even to avoid underperformance. The survey found that about 88% of value investors never want their managers to deviate, and 9% prefer a manager drift only under certain circumstances.

“If they had wanted to give them the leeway to move away from the value platform … they would have selected a growth manager or some other style,” Bullock says. “The consensus is hold the course.”

Despite the upswing in returns, the poor performance of last year will continue to play a role in how some plan sponsors allocate to value during the next two years. Sponsors are beginning to focus more on which value style best fits their investment needs.

The study shows that while 60% of the sponsors use low PIE in their portfolios, 70% find that style attractive. Another 49% utilize the CARP strategy, while 65% would like to use it. Deep discount is another arena that may see growth, with 22% of the sponsors using it and 41% showing interest in it, and income and contrarian styles could also see gains, with 20% and 19% using them, respectively, while 35% and 31% find them attractive. Virtually none of the value investors index or want to index their value accounts.

The study also reveals that 55% of the largest fund sponsors, those with $1 billion or more in assets, prefer deep discount, while 80% of the smaller fund sponsors, those with less than $250 million in assets, like the CARP style.

Completing the survey were 123 plan sponsors with $1 billion or more in assets, 79 plans with $500 million to $1 billion in assets, 68 plans with $250 million to $500 million, and 51 funds with $150 million to $250 million.

Indexing Takes Off

Where money managers can expect a real net growth in domestic equity business is in passive management, according to the study. Of the plan sponsors with enhanced index allocations, 39% planned to increase their exposure during the next two years. Only 1% of the respondents planned to decrease enhanced indexing. Pure passive allocations saw a planned increase of 28% and a planned decrease of 9%.

“When you look at where the increases will come, it’s really the enhanced index,” Bullock says. “There has been a growing awareness of the tools that allow you to customize around [a plan sponsor’s] specific requirements … people can modify and create an index they feel comfortable with.”

James McKee, a quantitative consultant at Callan Associates, Atlanta, Ga., says he’s certainly seen an increased interest in indexing of late. Plan sponsors have watched the amazing performance of domestic equity indices match and outperform their active managers and are feeling that active management isn’t delivering on its promises.

But he hesitates to say if that will mean a long-term trend toward moving assets into indexes. “It’s a reaction to this bubble we have that’s driving the cap-weighted index,” McKee says. “If you watch the S&P underperform for just two or three quarters, I think you will see a reversal of the blip.”

Whether or not it’s a reactionary blip, Bullock says, the plan sponsors have shown their interest, and managers should be ready to step. up. “It’s all a matter of timing,” he says.

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