market folly

Continuing our notes from the London Value Investor Conference 2013, the next speakers were Ian Lance and Nick Purves of RWC.  They presented the case for why value investing is hard in this market and one long idea: Pfizer (PFE).


Effectiveness of Value Investing in Today's Market

With the AUM of large value funds dwindling from its peak, Lance and Purves suggested that it was  time for a little humility and introspection amongst value investors.  They argued that the pace of technological change meant that value investors were often not well equipped to invest in technology companies as they tend to fixate on the accounts.

Another factor undermining the effectiveness of value investing in today’s market is that stock prices  do not mean revert as much as they used to. This means that doubling down on investments is  more risky. They speculated that globalisation prevents mean reversion and they gave the example  of the pressure that large US car makers have been put under by global competition.

They pointed out that the last 30 years have been very generous to investors and that the next 30  years may not be so kind. Were the last 30 years normal? Could the next 30 years be different? Has  anything changed permanently?

-  The discount rate has fallen dramatically   
-  Government deficit spending has been high
-  Household savings have fallen
-  Corporate profitability is at record levels
-  The aggressive actions of central banks have supported markets

Looking forward they feel the last 30 years was abnormal. The future could well be harsher. We  should look out for corporate lifecycles getting shorter. Investing in low valuation stocks may not  work so well. We will need to be more selective about our investments. Sustainability of cash flow  will be very important.


Long Idea: Pfizer (PFE)  

High ROCE, shareholder friendly management, cost reductions of $5bn p.a delivered over the last 3  years. Share buybacks $18bn since 2010. Improving pipeline. P/E 13x, dividend yield 3%.


Be sure to check out other investor presentations: notes from the 2013 London Value Investor Conference.