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Magnificent 7’s dominance creates greater opportunities for value investors

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This is a sponsored article from Harris Associates (an affiliate of Natixis Investment Managers).

Daniel A. Nicholas
Client Portfolio Manager
Harris Associates (an affiliate of Natixis Investment Managers)

With the Mag 7’s dominance easing and stock valuations widely spread, Harris Associates shows that value investing could be primed to outperform.

Why should investors have value investing exposure when growth has outperformed so strongly in recent years?

While it is true that growth significantly outperformed value for the decade prior to 2022 – as you can see in the chart below – longer-term performance has been much more mixed.

Since 2022, growth and value have both outperformed at various times. This has also been the case through much of stock market history. Between 2001 and 2018, value and growth traded sideways against one another. Right now, we are almost at peak levels of growth performance relative to value1. However, at these levels, we believe there is a case to be made for a more sustained period of value outperformance.

The S&P 500 Index has reached all-time highs several times in 2024. Given this, is the US market currently an attractive place to invest?

It is not unusual for the S&P 500 to achieve a new high. Over the past five years, it reached a new high 165 times – nearly three times a month on average2. While experienced investors know that timing the market is very difficult, for fundamental stock pickers and value investors, any time can be a good time to invest. The key is picking the right stocks at the right time.

While the S&P 500 is trading at relatively high valuations today, what makes it look attractive to us is the wider-than-normal spread between high price-to-earnings (P/E) stocks and low P/E stocks. This creates opportunities for stock pickers to outperform the index. Today, we can put together a well-diversified portfolio at an average P/E of around 10x (compared to a P/E ratio of 27x for the S&P 500 and 19x for the Russell 1000 Value Index3).

All the focus has been on the ‘Magnificent 7’4 and AI companies. Do you think this presents an opportunity?

AI is an incredible development that will undoubtedly change our lives, but that does not mean all AI companies will be winners. Many well-known AI companies are currently very highly-priced. For value investors like us, the risk/reward profiles just do not stack up. In addition, the recent strong performance of the Magnificent 7 has increased the technology concentration in the S&P 500 Index and even more in the Russell 1000 Growth Index.

We are currently finding more opportunities in stocks that indirectly employ AI. For example, Capital One Financial (NYSE:COF) excels at using consumer data to issue cards and has consistently been more advanced in its use of technology than competitors. Capital One’s management has explicitly stated they expect AI to help it increase this technological edge by lowering costs and improving customer outcomes.

In recent months, we have seen the rally broaden beyond AI inventors into other sectors. If this continues, investors with an allocation to value should be well positioned.

Value investing is so often about patience. How do you stay disciplined and avoid so-called value traps?

The key for us is to stick to our investment philosophy and the processes we have developed over many years. For instance, one of our three investment tenets is designed to help us avoid value traps: ‘companies expected to grow per-share value over time at least as fast as the S&P 500.” We also use Devil’s Advocate Reviews, in which an analyst not covering the stock presents the bear case against an investment.

This consistency of approach has been the key to our funds’ performance since we were founded in 1976. It was critical to our winning “Best Fund Provider Value Equity” and “Highly Commended – US Equity” in the 2024 Asian Private Banker Asset Management Awards for Excellence5.

Harris Associates is an affiliate of Natixis Investment Managers. Learn more about Harris Associates’ award-winning approach to value investing.

1Source: Harris Associates analysis in USD using FactSet data from October 31, 1992 through March 31, 2024. Current performance may be lower or higher than the performance data quoted. All returns reflect the reinvestment of dividends and capital gains and the deduction of transaction costs. Past performance is not a guarantee of its future results.
2Source: Bloomberg, 5 years prior to June 2024.
3Source: Harris Associates, Bloomberg, all PE ratios taken on 31 May, 2024..
4The “Magnificent 7” includes Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta and Tesla.
52024 Asian Private Banker Asset Management Awards for Excellence were issued by Asian Private Banker, reflecting product performance, asset gathering, service quality and fund selector feedback as at 31 August 2023. For award’s details and methodology, please refer to https://asianprivatebanker.com/awards/asset-management-awards-for-excellence-2024/

In Hong Kong: The content of this document is strictly confidential and has been prepared for informational purposes only and for the exclusive use of professional investors. Under no circumstance may a copy be shown, copied, transmitted or otherwise distributed to any person or entity other than the authorised recipient without the advance written consent of Natixis Investment Managers Hong Kong Limited. Investment involves risk. The information contained herein does not constitute an offer to sell or deal in any securities or financial products. The content herein may contain unsolicited, general information without regard to an investor’s individual needs, objectives, risk parameters or financial condition. Therefore, please refer to the relevant offering documents for details including the risk factors and seek your own legal counsel, accountants or other professional advisors as to the financial, legal and tax issues concerning such investments if necessary, before making any investment decisions in the fund(s) mentioned in this document. Past performance information presented is not indicative of future performance. If investment returns are not denominated in HKD/USD, USD-/HKD-based investors are exposed to exchange rate fluctuations. Natixis Investment Managers Hong Kong Limited is a business development unit of Natixis Investment Managers, a subsidiary of Natixis that is the holding company of a diverse line-up of specialised investment management and distribution entities worldwide. Certain information included in this material is based on information obtained from other sources considered reliable. However, Natixis Investment Managers Hong Kong Limited does not guarantee the accuracy of such information. Issued by Natixis Investment Managers Hong Kong Limited.

This is a sponsored article from Harris Associates (an affiliate of Natixis Investment Managers).

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