Can Value Investing Work in Emerging Markets?

What does value investing have in common with the emerging markets?

This is not a trick question. Rather, it is a statement of sympathy. Just as value investors are used to going down the road less travelled alone, so are emerging market investors. The rest of the investment community has written off both sets of investors as dinosaurs buried six feet under and forgotten about us. The MSCI USA Growth Gross Total Return Index has compounded at a 20.0% annual rate of return during the decade ending in 2021.[1] On the other hand, the MSCI USA Value Gross Total Return Index has compounded at a 13.0% annual rate during the same period.[2] While a 13.0% annual return over a decade is an attractive return, the per-year return declines and the differential with the growth index increases as the decade progresses. The final nail in the coffin was the period from 2018 to 2020 when the value index delivered an annualized return of 5.6%, whereas the growth index returned 24.4%, leading many to write-off the value discipline as at best “flawed” (thus the market talk of value having failed to capitalize technological innovation in book value), and at worst “dead.”[3] With figures such as these backing one’s investment discipline, who needs enemies?

Emerging market investors carry the same cross as value investors with a 5.9% annualized return for the MSCI EM Total Return Index over the decade ending in 2021 competing against a 16.6% annualized return for the MSCI U.S. Gross Total Return Index over the same time period.[4]

The irony for value and emerging market investors alike is that we expect to outperform other investment styles / universes on an ex-ante basis. Indeed, many studies, such as the paper titled “What Has Worked in Investing” by Tweedy, Browne Company, LLC,[5] have noted the historical outperformance of value as an investment discipline during long periods of time, including from April 1968 to April 1990 in the United States. Emerging markets, for their part, offer the possibility of faster growth than developed economies owing to their higher rate of working population growth and greater room for productivity improvements.

Proponents of a value discipline face the uphill battle of reminding the rest of the market that prices are not simply numbers but form an integral part of the investment return equation. EM investors face a similar challenge when explaining the merits of the investment universe to U.S.-based savers as value investors face when advocating for their discipline to proponents of a growth-oriented approach. The added complication for those of us who focus on the emerging universe is that it has a more checkered history than value’s storied past in the US.