Value’s time to shine

What is your outlook for US equity markets?

Going into the second half of the year for US equities we're finding plenty of value in the market. The market's focus on a select few securities has allowed us to find many, many ideas that have been left behind. In the US market, there's very good growth rates, very good cash cashflow generation run by strong management teams. That's exactly what we look for. And with these companies trading at a low multiple of their future earnings growth, we think the outlook is quite bright in the United States.

What is your outlook for global equity markets?

Globally, we're finding value across the world. While the United States is making an all time high in its allocation within the MSCI world, we're finding value in Europe, Asia, the United Kingdom, not just the United States. We believe growth rates have been mispriced across the world, and we're able to identify very strong management teams with good prospects at low valuations.

What are some of the key macro risks to your outlook?

The key risks to our outlook always have to do with the growth of the economy and the environment for managements to be able to maximize profits. A risk is always regulation, and what we're seeing across the world is trying to figure out government's role within driving global growth. In Germany, we're seeing a reset where the government is supporting infrastructure investments, defense investments, whereas in the United States, maybe a little bit of a retrenchment. That's leading to significant uncertainty in the markets. Uncertainty and volatility is opportunity for active managers. We can sort through this noise to really try to understand what the impact to individual companies are. Today, we're finding that that noise is providing us a great opportunity to buy good businesses at a discount.

Why is now a compelling time for value?

So as a value investor, we think this is a very compelling market. The market has had a strong preference for growth investing, but what we would say is any company can be cheap versus itself. That's how we define value: a company is trading at a discount to its intrinsic value. Now we're finding a lot of companies that have very strong growth rates that are being mispriced because they're labeled as a value company. We would contend that you don't have to give up growth to go value. In fact, there's many good growth rates that are being mispriced because of how these companies are labeled by the marketplace.

Why is active management so important in 2025?

As an active manager, in a way, we have an ability to diversify more than the index. Today we actually see the index as being risky for three reasons. One, its concentration, two, its style, and three, its valuation.

1. So firstly concentration, we've gone back all the way to 1957 and the S&P 500 is more concentrated in the top five holdings than it ever has been. We also see that concentration by industry. We're seeing a big preference for IT information technology companies, and that sector makes up over 30% of the index. As active managers, we don't have to invest based on what the weighting of the index is. Instead, we're investing in individual companies that we think are valuable
2. As far as style goes, going back to last year in 2024, the S&P was actually defined as a growth index for one of the first times. It's providing investors not blend exposure, but growth exposure. We think there's style risks that investors are taking if they go passive today.
3. And lastly, at valuation, the market trading at about 22x earnings at the end of 2024, based on historical correlations would suggest you would only expect a 3% return from the S&P 500 over the next five years. Now, that's a subpar outcome for many investors that can get 3% from fixed income.

As active managers, we don't have to pay the high prices that the market is charging. Instead, we can search out the low prices and the mispriced growth rates. That's why it's so exciting to be a value manager today.