Value investing gets a second look

As profit warnings mount, value investing is making a comeback and even growth fund managers are hoping for a piece of the value pie.

Janus International, known mainly as a growth fund manager, is taking a closer look at value investing as corporate earnings slow and stock markets slide. This month it launched its Strategic Value Fund in Hong Kong following its successful launch in the US in February.

Janus says the fund is designed to complement rather than replace existing portfolios. Investors who have bulked up on information technology, biotechnology and other growth stocks should add value stocks to their portfolio as slower economic growth increases the risk of stock price declines associated with disappointing earnings.

Value stocks, which have already been beaten down, are less sensitive to earnings news and can add an element of protection against risk when markets are falling, says Edmund Lacis, regional director of Janus International in Hong Kong.

"We're not saying it's time to get out of growth stocks and into value stocks because we still think there's money to be put into growth stocks. But we also think people need to have some value exposure in their portfolio," he says.

Value revisited

Value investing, or investing in stocks that are trading at a discount to their intrinsic value, has received short shrift from investors eager for a slice of the high growth technology and telecommunications pie. Now that the dotcom bubble has deflated and telecom valuations have plunged amid heavy spending for third generation licenses, value funds are beginning to look appealing again.

"It's definitely easier to sell our story to investors and the public today than it was a year ago," says Norman Ho, who helps manage $140 million in assets for Hong Kong-based Value Partners, a value-based investment house. "Back then, when you told people they should base their investments on measures such as price-earnings ratios, they didn't want to listen. They just wanted to know about page-views. Now it's completely different."

Value Partners says its "A" Fund is up 14% in the year to date, while the Hang Seng index is down 20%.

Janus's Value Fund has also benefited from the plunge in tech stocks. In the US the fund has attracted $3.1 billion since its inception 10 months ago and its return is up 7.6% compared to a drop in the Standard & Poor's 500 index of 1% in the same period. In Hong Kong the fund is up 1% since it started trading on December 1. Among its top 10 holdings are US companies Colgate Palmolive, Tyco Corp., Coastal Corp. and SBC Communications.

Value funds are thin on the ground in Asia - research house Lipper doesn't break them out as a separate group - but value-investing as a technique is making its way back into the vocabulary.
"There's been very much of a change since March when the NASDAQ started to decline," says Linda Csellak, who helps manage $3 billion in assets for Indocam Asset Management in Hong Kong. "On a global basis, value has outperformed this year."

While Indocam's house investment philosophy is "growth at a reasonable price", Csellak says she's become much more conscious of a company's valuation and of the reliability of its earnings. She is now looking more closely at bank stocks, some Hong Kong property stocks and, in Korea, domestic companies that she says are more sheltered, such as Shinsegi department store.

"I'm still looking for growth rather than for companies that are cheap, but I want to be sure that their earnings are solid," she says. "In Asia you can buy stocks that aren't known as growth stocks but have nice earnings growth and a more certain earnings stream than the tech stocks."

Hurdles in Asia

For die-hard value investors looking for stocks that trade at lower price-to-earnings, price-to-book or price-to-sales ratios than their peers, there are some additional hurdles in Asia. Traditional western catalysts for unlocking hidden value such as bankruptcies, hostile takeovers and corporate breakups, are uncommon in Asia and nepotism can hinder needed changes of management.
"What's value in Asia?" asks Stuart Winchester, a fund manager at growth-oriented Dresdner RCM who helps manage $4 billion in assets. "Management here knows nothing about shareholder value."
Winchester says he isn't changing his investment strategy or introducing value-investing methods in light of the plunge in tech stocks. "At the end of the day there is still something growing out there," he says.

In any case, in Asia, some argue it's not always easy to distinguish between growth and value stocks.

"Value and growth are two sides of the same coin," says Justin Pascoe, director of investments at State Street Global Advisors (SSGA) in Hong Kong, a fund management company that leans towards value-investing. "If you do a discounted cash flow analysis you're making assumptions about a company's future growth rate. The difference is that it is more difficult to make forecasts with high growth stocks, whereas with value stocks the cash flows are probably more certain."

While the principals of value investing may be making a comeback, it's not yet something traditional growth fund managers are willing to shout from the rooftops. Even as it introduces its value fund, Janus is keen for it to be seen merely as a "diversification" option for its clients. "It's not real sexy as a standalone fund," Lacis says. "But within a portfolio with a private banking distributor it makes good sense."

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