This video shows investors how they can improve their portfolio’s performance by owning value companies.
Achieving Higher Returns with Value Investing
So, what are your options for achieving higher returns in your investment portfolio?
In our previous video titled, “Achieving Higher Returns with Small Companies” we showed you that you can increase your portfolio’s expected return, without speculating, by simply owning small cap companies in the US, International, and Emerging Markets. Is there another asset class proven to compensate investors with higher returns without taking on unnecessary risk? The answer is yes. They’re called Value companies.
In this session we’re going to show you how you can increase your portfolio’s performance, without speculating, by owning Value companies around the globe. To do this, let’s again revisit the four primary asset class groups we previously discussed in our video, “Asset Class Investing”. These asset classes are: Large Cap Growth, Large Cap Value, Small Cap Growth, and Small Cap Value.
We already know that Small Cap companies are riskier than Large Cap companies, and therefore offer investors a higher expected return. But, what about Growth vs. Value companies? If I were to ask you which group of companies are riskier, Growth companies or Value companies? I would guess that you would probably select Growth companies, and you’d be wrong.
Growth companies tend to be healthier companies with growing earnings, while a Value company has a lower stock price because they’re out of favor with investors. Reasons may include: the company is having product issues, management issues, legal issues, earnings issues, or all of the above. As a result investors and lenders view Value companies as inherently risker. Therefore, similar to Small Cap companies, a Value company’s cost of capital is greater, so lenders and investors expect a higher return for taking on higher risk. As a result, Value companies must produce higher returns; or else why would you invest in them if you could get the same return from a Growth company that’s safer?
To demonstrate this point, let’s take a look at the average annual return of US Large Cap Growth companies vs. US Large Cap Value companies as far back as data exist, which is 1926. Over this complete time period through 2012, US Large Cap Growth companies have produced an average rate of return of 9.2% annually, while US Large Cap Value companies, over the same time period, have produced an average annual return of 10.9%. Keep in mind, this is not just a handful of US Large Cap Value companies, but rather all publicly traded Large Value companies that exist.
Now if what I’m saying is true about the higher expected return associated with Value companies, then a Value company’s “return premium” should not just be limited to large companies in the US. The same higher expected return should also exist for small companies in the US. Looking at US Small Cap Growth companies as far back as data exist, which is also 1926, we see that they produced an average rate of return of 8.8% annually, while US Small Cap Value companies, over the same time period, have produced an average annual return of 13.9%, over 5% per year higher!
How about companies in International Developed Markets, such as Japan, Australia, Germany, France, and the United Kingdom to name a few? Well, there’s also data on these companies that goes back as far as 1975 that shows International Growth companies returned on average 8.8% annually, while International Value companies returned, over the same period 14.9% annually, which shows that the Value return premium is a global phenomenon. If that’s the case, then we should also see similar results in the Emerging Markets, in countries like China, Brazil, India and others. Here we have data going back to 1989, which shows that Emerging Market Growth companies returned on average 10.3% annually, while Value companies in the Emerging Markets returned 15.9%.
So what does this mean to you? Well, there’s good news and bad news. The good news is you can increase your portfolio’s expected return, without speculating, by simply owning Value companies around the globe. The bad news is that most 401k plans may only offer US Value companies as a fund choice. If your plan does offer an International and Emerging Market fund option they are most likely a blend of growth and value together in one fund. This is where having access to a self-directed brokerage account linked to your retirement plan will benefit you by allowing you to purchase low-cost ETFs (exchange-traded funds) that invest specifically in indexes that track US, International, and Emerging Market Value companies.
For information on the benefits of using a self-directed brokerage account linked to your retirement plan, and the benefits of ETFs, you can view these videos at RetirementInvestor.com.
In the meantime, remember, that if its bigger returns you’re seeking, Value companies around the globe may deliver the greatest “value” to investors!
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