According to one seasoned value investing team that has been in the business for decades, index funds may be the next Nifty-Fifty. Many financial advisors are pushing index funds as one decision investments. Never mind the valuation ratios that have only been higher at the peak of the 1929 and the 2000 stock market bubbles these investors are told. It doesn’t matter how expensive the FANG stocks are–they are winner take all businesses.t
Barron’s has more:
Boniface (Buzz) Zaino of Royce Funds knows better than most the cost of charting a contrarian course. The value-oriented portfolio manager doesn’t seem worried that his strongly performing active style appears to be losing support in the current index-crazed investment world: “The attitude of investors tends to change with whatever is performing well at the current time. It’s been that way as long as I’ve been in the business.”
And he has been in it for a while. Passive investing reminds the 74-year-old Zaino of the “one decision” approach that investors used more than four decades ago. They simply bought the highflying “Nifty 50” stocks without much regard to price. That led to the inflation and subsequent collapse of the stocks and some of the mutual funds that held them. These stocks, which included Procter & Gamble (ticker: PG), Philip Morris International (PM), General Electric (GE), and Coca-Cola (KO), saw their valuations rise as high as 50 times earnings. The fall was equally dramatic, resulting in losses as high as 50%. “Indexing produces the same kind of valuation logic that led to those horrific losses in the early ’70s,” muses the manager. “There is no one there to say, ‘No, this doesn’t make sense.’ ”
In contrast, Zaino and his 53-year-old co-manager, Bill Hench, often gravitate toward stocks that aren’t in an index for Royce Opportunity (RYPNX), a small-cap value fund with assets of $1.5 billion. That means the fund skews considerably smaller than its peers—its 244 stocks have an average market value of just $843 million; the average small-cap value fund’s holdings have an average market value of $2.9 billion, according to Morningstar. Many of Royce Opportunity’s stocks have little Wall Street research coverage.
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Jeremy Jones, CFA
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