Investors are flocking to active ETFs in search of more market alpha amid the volatility. Pickers' performance has been especially effective in high volatility, and Muni bonds are another great option. Outflows have been consistent from Muni bonds since 2021 but that tide is starting to turn as yields rise and investors need an inflation cushion. Moreover, their high credit scores and tax advantages are extremely attractive to high net worth investors. One option is Avantis Core Municipal Fixed Income ETF (AVMU) which is an active muni investment fund. The fund has a pretty low expense ratio (0.15%), and they also believe it can outperform in a rising yield environment.

Finsum: Yields are beginning to look more attractive, but remember how much of that is built-in inflation.

The SEC has proposed rule and form amendments that, would require additional disclosures regarding environmental, social, and governance (ESG) investment practices by RIAs, registered investment companies, and business development companies. The SEC also proposed rules to extend the 80% investment policy requirement in Rule 35d-1 under the Investment Company Act to any registered fund with a name that suggests it focuses on ESG factors. These proposed rules are aimed at helping investors navigate the endless array of ESG investing options. There is currently no tailored rule for ESG investing and the proposed rules would require consistent ESG-related disclosures about ESG products and services. Disclosures will include how a firm evaluates ESG factors and or how it achieves its stated ESG objectives. Advisors and funds will now need to take any necessary steps to prepare for these ESG-related disclosure requirements.

Finsum: The SEC proposed regulations on how advisors and funds label their ESG strategies should provide investors with consistent and reliable information on ESG products and services.

Alternative assets are exploding, but when will they become available in defined contribution plans? Diversified investing is one of the first things taught to advisors, but with many asset classes becoming correlated, it becomes tough to truly diversify portfolios. Alternative assets are one solution. They have the potential to hedge volatility, increase portfolio income, and provide that diversification. Research firm Preqin is projecting that global alternatives assets will hit $23.2 trillion by 2026, up from an estimated $13.3 trillion at the end of last year. However, 401K participants can’t access these asset classes, aside from exposure in target-date funds. Some plan fiduciaries are looking to change that and are reviewing DC plan menu options. But they face a series of tailwinds such as low liquidity and high costs, not to mention concerns from the DOL. As organizations such as the Defined Contribution Institutional Investment Association are exploring the issue, it’s not too far-fetched to think it may become a reality at some point.

Finsum: Defined contribution plans such as 401Ks currently only include traditional investment options, but that may change in the future as plan sponsors and organizations look for ways to add alternatives to the menu.

As market volatility continues, investors are flocking to annuities. This could be the biggest year yet for annuity sales. Insurance industry data firm Limra is forecasting annuity sales in the range of $267 billion to $288 billion this year, which would break the record of $265 billion set in 2008, during the financial crisis. Annuities offer investors a way to hedge market volatility, so it would make sense that sales are way up this year. The S&P 500 is down over 20% so far for the year and it's only June. Bonds haven’t been much better as the iShares Core U.S. Aggregate Bond ETF, which tracks the U.S. bond market is down 11.5% year to date. Investors have also been enticed by better payouts amid a rising interest rate environment. These benefits seem to outweigh costly premiums and less liquidity.

Finsum: Annuity sales have been soaring as investors look to hedge market volatility, making them an attractive option for risk-averse investors. 

 The past can inform the future. We can all learn by revisiting two extended periods value stocks underperformed on a huge scale and compare them with the current era when disruptive tech stocks have, once again, been outperforming value. 

The Nifty Fifty

The first period (when value stocks underperformed growth stocks on a huge scale) can be highlighted in the years leading up to 1972 when an extended bull market had taken a group of growth securities to extraordinary levels. They were iconic companies known as the “Nifty Fifty” and included technology companies of that era such as IBM, Texas Instruments, and Xerox as well as a host of other companies including Walt Disney, Coca-Cola, and McDonald’s, which had been considered “one-decision” stocks that did not fall in stock price. But in the following two years, many of them lost two-thirds of their value. When thinking about today, it is also interesting to note the collapse of the Nifty Fifty happened amid rising inflation and an oil shock caused by the Arab oil embargo. 

The Dot.com Darlings

The second period occurred in the years leading up to 2000, when a group of so-called “dot.com darlings” such as Cisco, Sun Microsystems, and Microsoft, several of which had achieved extraordinary price/earnings valuations of 100X earnings or more, then crashed even more spectacularly, brought down by the weight of excessive valuations. 

The Fabulous FAANGS + Microsoft (FANMAG)

Over the last decade, we have had another group of innovative companies that have captured the imaginations of investors, and with the help of zero interest rate policies, helped lead equity markets to all-time highs.

What Happens Next

Growth investing always feels better, easier. Value investing requires the ability to look wrong for a while.

Over the last decade, value investing did not prove to be as profitable as paying up for technology stocks. Articles in the financial press even reported, not that long ago, that value was dead, dying, or at the very least compromised.
But we believe that if you look at the metrics differently—if you focus not just on price to book value, but instead on earnings-based enterprise multiples—then you see a different story. While value metrics such as price to book have performed poorly, value-oriented companies with low enterprise multiples have performed better. Looking back over the last 50 years, the resurgence of value should be reassured. And while it’s hard to know for sure, we believe we could be in the midst of that resurgence today, as rising inflation and the prospect of higher interest rates, once again, appear to be wreaking havoc with highly valued, speculative growth stocks. 

So, Lesson #1 is that price matters.  Don’t give up on value investing. Stay on the Bus! 

If the past is indeed prologue, this time is not different, but simply a normal period of underperformance for an investment approach that has handily beaten its growth counterpart for much of the last century, albeit in a very lumpy manner.  (Of course, past performance is no guarantee of future results.)

Lesson #2 is simple enough: Don’t forget Lesson #1.

A list containing all recommendations made by Tweedy, Browne Company LLC within the previous 12 months is available upon request. It should not be assumed that all recommendations made in the past have been profitable or that recommendations made in the future will be profitable or will equal the performance of the securities in this list.

Tweedy, Browne Company LLC’s 100-year history is grounded in undervalued securities, first as a market maker, then as an investor and investment adviser. The firm registered as an investment adviser with the SEC in 1975 and ceased operations as a broker-dealer in 2014.

This article contains opinions and statements on investment techniques, economics, market conditions and other matters. There is no guarantee that these opinions and statements will prove to be correct, and some of them are inherently speculative. None of them should be relied upon as statements of fact.

Any discussion of sectors, industries, or securities herein is informational and should not be perceived as investment recommendations. Securities discussed herein were not necessarily held in any accounts managed by Tweedy, Browne.
Current and future portfolio holdings are subject to risk. The securities of small, less well-known companies may be more volatile than those of larger companies. In addition, investing in foreign securities involves additional risks beyond the risks of investing in securities of U.S. markets. These risks include economic and political considerations not typically found in U.S. markets, including currency fluctuation, political uncertainty, and different financial and accounting standards, regulatory environments, and overall market and economic factors. Force majeure events such as pandemics and natural disasters are likely to increase the risks inherent in investments and could have a broad negative impact on the world economy and business activity in general. Value investing involves the risk that the market will not recognize a security’s intrinsic value for a long time, or that a security thought to be undervalued may actually be appropriately priced when purchased. Dividends are not guaranteed, and a company currently paying dividends may cease paying dividends at any time. Diversification does not guarantee a profit or protect against a loss in declining markets. There can be no guarantee of safety of principal or a satisfactory rate of return.

Diversification does not guarantee a profit or protect against a loss in declining markets. There can be no guarantee of safety of principal or a satisfactory rate of return.

Price/book (or P/B) ratio is a valuation measure calculated by dividing the market price of a company’s outstanding stock by its book value (total assets of a company less liabilities) and then adjusting for the number of shares outstanding. Stocks with negative book values are usually excluded from this calculation.

Price/earnings (or P/E) ratio is a valuation measure that compares the company’s closing stock price and its trailing 12-month earnings per share.

The Managing Directors and employees of Tweedy, Browne Company LLC may have a financial interest in the securities mentioned herein because, where consistent with the Firm’s Code of Ethics, the Managing Directors and employees may own these securities in their personal securities trading accounts or through their ownership of various pooled vehicles that own these securities.

Past performance is no guarantee of future results.