The Mean Reversion of the Value Style
The Value Style has been strengthening in recent months. Looking at the six-month rolling performance, Large-Value Stock Index was underperforming Large-Growth Stock Index since 2019, but the opposite happened in past 6 months. Looking back, Large-Value Stock Index has quietly strengthened since Aug 2021. It was barely noticeable at the beginning, then became more and more pronounced, and finally broke out with significant trading volumes after January 1, 2022.
We have held onto all our value stock positions and gone through the darkest moment of the Value Style.
Minority Asset Management chose big-cap value stocks as main investment direction since 2016. Our holdings such as Real Estate Developers, Banks, Insurers and Liquor Producers were all under pressure in 2021. We did not change convictions and to chase hot sectors blindly, but reviewed our positions carefully and waited patiently. We also held quarterly video conference calls to actively and honestly communicate with distributors and investors, to enhance their confidence. Even at the weakest moment of the Value Style, we never cut our positions. Our portfolio loss reduced gradually after July 2021, and within the first five trading days of 2022, it has recovered all the loss incurred in 2021 as the Big-cap value stocks soared.
Our investors also stood the test of the market.
Watching other funds making money while one’s own fund incur loss naturally makes people worried, anxious, want to cut loss and chase good performing funds. But long-term investment essentially is a test of rationality and self-discipline. Most of Minority Asset Management’s investors managed to hold onto our fund and went through the darkest moments of 2021 together with us. The market will reward this rationality and self-discipline.
The current valuation of the market is not high, neither is the overall risk level.
Among different kinds of Styles’ Indices, only Large-Growth Stock Index is at relatively high valuation level. Large-Value, Small-Value and Small-Growth Stock indices’ valuations were all at lows of the past years.
Institutional Investors started to adding Big-cap Value Stocks.
Using north-bound capital inflow of Hong Kong Connect as an example, foreign investor’s holdings of Small-cap Value and Small-cap Growth Stocks have been increasing consistently in 2021. Their holdings in Big-cap Value stocks have also seen long-waited increase for past 30 days. On the other hand, their holdings in Big-Cap Growth stocks are declining.
We still see attractive risk-reward ratios in our heavy weighted sectors.
Within the Real Estate Development sector, industry leaders with low leverage are given excellent opportunities to gain market shares at the expense of those highly-leveraged players who lost the ability to acquire more lands. The projected gross profit margins in the two land auctions in 2H2021 were much higher than those in 1H2021. Quality developers also enjoy the credit support from banks to buy development projects at fire sale price from troubled developers.
For the Banking sector, the asset quality improvement and profit growth driven by provision reduction continues, as the profit growth accelerated for the first three quarters in 2021. Despite the high base in 4th quarter 2020, we expect the YOY profit growth in 4th quarter 2021 will be maintained. It will be verified soon, as some banks going to release FY2021 earnings flash in January 2022.
Despite lackluster New Year sales expected for Insurers, the extremely low valuation of the sector has fully reflected the market’s pessimism. The insurers are likely to follow the strength of the Value Style.
We have been waiting for good timing to increase our investment based on the second perspective we mentioned in last quarterly letter.
While holding onto our investment based on the first perspective of our usual investment belief, we have further innovated our investment methodology on growth sectors with strong momentum. We have been following and analyzing them closely without impulsive actions. Over the next few months, we will increase our investment in this second perspective. The exact proportions and timings will depend on the market condition. Please see our last quarterly letter “Integrating Different Investment Perspectives” for more details.
There were gains as well as regrets in 2021. We were deeply empowered by our investors’ trust and always held our head high even in the darkest moments.
We will face twists and turns, winds and storms in 2022, but still believe a better world ahead!