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'Value is not working': Inside a 2-day virtual gathering of bargain-seeking investors struggling with a market that's been stacked against them for a decade

Paul Tudor Jones Paul Tudor Jones
Famed investor Paul Tudor Jones has said the pandemic has thrown off economic models.
REUTERS/Eduardo Munoz

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  • Value investors, who seemed poised to take control during the initial market crash from the pandemic, have been steamrolled by rising markets. 
  • That followed years of underperformance, as the long-running bull market following the financial crisis yielded double-digit growth across the board. 
  • At a two-day virtual conference the New York chapter of the CFA Institute hosted this week — named after Ben Graham, the father of value investors — speakers touched on their picks in the quickly changing markets. They also implored listeners to stick with philosophy.
  • One remote speaker put it bluntly at the conference: "Value is not working; growth is working."
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It was shaping up to be value investors' year.

When the coronavirus pandemic started shutting down the global economy earlier this spring, hedge funds were jumping out of once-high-flying growth stocks. They sheltered in value names, or companies they view as undervalued in the market with strong underlying qualities. 

Managers predicted money-losing public companies would be forced to show a path to profitability in the new world and vindicate the value investor. For longtime value investors who have tried to call out bubbles for years, it was all coming true. Until it wasn't. 

Unprecedented fiscal and monetary stimulus measures have sent stocks soaring since late March, regardless of fundamentals — and momentum, or growth, investors once again rule the roost.

The Federal Reserve cut its benchmark interest rate to near-zero in March to help backstop markets, a move that continued to encourage speculation that favors growth over value. Meanwhile the Trump administration sent checks directly to US households as the pandemic devastated the economy and sent unemployment soaring. 

Just take Vanguard's growth-stock-tracking exchange-traded fund, up more than 10% for the year. A similar value offering from BlackRock is down more than 17% in the same time, according to the firm's website. 

It's humbled investors like billionaires Paul Tudor Jones and Stanley Druckenmiller. Jones said, tongue placed firmly in cheek, that people would be better off getting financial advice from TikTok than from expert investors. For other value-seekers, it's been emblematic of the last decade of futility. 

Value conference slide
Glenn Tongue, portfolio manager for Deerhaven Capital Management, presented this slide at the conference
Screenshot

"Earnings Trends Favor Large > Small, Growth > Value," Jonathan Golub, Credit Suisse's head of US equity strategy, said in a June 1 note to clients, adding the Russell 1000 Growth index is forecasted "to hold up much better" than its value-oriented counterpart. 

Amid the wreckage, value investors congregated this week for a two-day virtual conference held by the CFA Institute's New York chapter.

At the Ben Graham conference, named after the father of value investing, speakers presented their winning picks in the markets — one recommended going long in Campbell Soup, while another recommended shorting shares of the software company Splunk — along with views on their shared investing philosophy. 

It wasn't pretty. After all, the market hasn't exactly rewarded some of their strategies.

"Value is not working; growth is working," said Glenn Tongue, portfolio manager at Deerhaven Capital Management.

One of his slides detailing what to do when a position is "running against you" began with more of an exclamation than real advice: "This is so hard!" and "No wonder mismanaging this has blown up some of the world's smartest investors."

The performance of giant tech stocks in the market, despite some companies' underwhelming profit margins, has consistently frustrated value investors. 

Read more: Billionaire Paul Tudor Jones says the pandemic has thrown off economic models so much that people would 'be better off getting financial advice from TikTok'

Valuations of companies like Tesla have jumped ahead of competitors that have more product or history. 

"More people are of the mind that valuation doesn't matter, which as we all know — or I think, I hope we all know — just doesn't make sense," said Adam Barth, director of equity research at Gotham Asset Management, who filled in for co-founder Joel Greenblatt as the keynote speaker on the conference's first day.

"Ultimately, at some point we get to a place where these growth entities become massively overvalued," Barth added. "So what we have to wrestle with is in terms of valuation."

Value investing conference slide
Jonathan Brolin, founder of Edenbrook Capital, ended his presentation with a message for investors: "Value lives"
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Meggan Walsh, a senior portfolio manager and the head of the dividend value team at Invesco, presented during the first day of the conference, and laid out her positive thesis around shares of Campbell's Soup. 

With a relatively low multiple, the company has very little debt, and has consistently paid out a dividend for about four decades, Walsh said: hallmarks of a name value investors would find attractive. 

The company has also benefitted from its food sales during the pandemic, she said, a trend she thinks will persist. 

The policies central banks and governments have implemented, like the Federal Reserve's Robinhood.

That's added to the inflated prices in the markets. 

"Gambling is not investing. Hertz is a zero," Tongue said, in reference to one of Robinhood traders' recent favorite stocks. Hertz filed for Chapter 11 bankruptcy protection on May 22. 

Jonathan Brolin, the founder of Edenbrook Capital, was less resigned about the field, but acknowledged the realities.

In a slide that had a graffitti-esque "Value Lives" picture that was partially cropped out, Brolin's presentation read: "If you want to find value hidden beneath a rock, be prepared to do some heavy lifting."

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