Charles de Vaulx: Why Value Investing Has Slumped but Will Rebound

Episode Summary

Executive Summary: Charles DeVoe argues that value investing’s long slump has been driven mainly by unusually low rates, massive buybacks, weak economic cyclicality, and a much slower fade rate for quality/growth businesses. He says these forces have made cash-rich, downside-focused value portfolios look worse, but believes the headwinds are temporary and that a more normal cycle, higher rates, or inflation would restore value’s advantage.

Main Topics: Why value has lagged growth (Priority: 5/5): DeVoe says ultra-low interest rates, duration effects, and stretched valuations have favored long-duration growth stocks over value stocks with nearer-term cash flows. Buybacks and cash hoarding (Priority: 5/5): He argues huge corporate buybacks have reduced the number of sufficiently cheap opportunities, pushing value managers into large cash positions and muting relative performance. Muted business cycle and lower volatility (Priority: 5/5): A subdued post-2009 economy has reduced the overshoot/undershoot conditions value investors rely on, especially in cyclical quality businesses. Reversion-to-the-mean has weakened (Priority: 5/5): DeVoe contends that growth and quality companies now retain their advantage longer than in prior decades, while many traditional value sectors have suffered structural disruption. Global and family-owned businesses as an edge (Priority: 4/5): He says value has worked better outside the U.S., especially in more cyclical markets and among family-controlled businesses with stronger long-term incentives. Active management, indexing, and downside protection (Priority: 4/5): DeVoe welcomes passive flows but argues genuine active management still adds value in less efficient markets, with his firm emphasizing diversification, cash, gold, and cheap-but-safe securities. Inflation, deflation, and macro risk (Priority: 4/5): He worries more about future inflation than deflation, and sees debt buildup and policy responses as the key macro risks to watch rather than precise forecasts.

Key Arguments: Ultra-low rates hurt value more than growth because growth cash flows sit farther in the future, making growth stocks much more rate-sensitive (higher duration). Corporate buybacks in the U.S. have kept many stocks from becoming cheap enough to offer value investors a margin of safety. The post-2009 U.S. economy has had an unusually long, shallow business cycle, reducing the volatility that creates value opportunities. Quality and growth businesses now sustain high profitability for longer, making mean reversion less reliable than in prior decades. Technological disruption has turned many formerly cheap sectors into value traps rather than bargains. Value has worked better in more cyclical economies and in markets with more family-controlled companies, such as parts of Europe and Japan. Passive investing can help reveal true active managers, but it is not the main reason value has struggled; the real drivers are rates, buybacks, and weak cyclicality. His firm’s cash is not a market-timing bet but a residual of disciplined buying and selling when securities reach intrinsic value. Gold and high-yield bonds can play a role when they offer asymmetric payoff or diversification, but only when pricing is compelling. The biggest future upside for value could come from either a recession-driven reset or inflation/higher rates that compress growth multiples.

Data Points: Treasury duration example: 10-year Treasury price down 24% - If yield rises from 1.7% to 4.7% (3 percentage points), per DeVoe's illustration Treasury duration example: 30-year Treasury price down 45% - If yield rises from 2.2% to 5.2% (3 percentage points), per DeVoe's illustration Relative performance window: Past 5 to 7 years - DeVoe says his funds’ underperformance was largely due to cash drag from lack of cheap stocks Corporate buybacks: $400B–$700B annually - Estimated scale of U.S. share repurchases supporting equity prices and reducing bargains Business cycle recession time share: 50% / 26% / 8% - Time spent in recession in the 19th / 20th / 21st centuries, as cited from Bernstein Average expansion length: 25 months / 44 months / 101 months - Average economic expansion duration in the 19th / 20th / 21st centuries, per Bernstein study Average GDP decline depth: 3.7% / 4.3% / 2.1% - Average real GDP decline during recessions in the 19th / 20th / 21st centuries, per Bernstein study Average real growth: 4.1% / 3.6% / 2.8% - Average real growth in the 19th / 20th / 21st centuries, per Bernstein study Growth stock fade rate: 50% after 3 years; 67% after 5 years; 90% after 10 years - Historical U.S. data cited to show growth stocks used to lose status quickly Profitability persistence: 30% to 50% - Probability of remaining in the highest ROE quartile five years later, early 1990s vs now, per Bernstein Margin persistence: 50% to 90% - Probability of top-decile margin firms remaining in top two deciles after five years, mid-1990s vs last five years MSCI World Japan weight: 40%–45% - Approximate Japan weight during the late-1980s bubble, used as an example of benchmark concentration SP500 drawdown: 47%–48% - Referenced decline from September 2007 to March 2009 to illustrate volatility many investors cannot tolerate Cash allocation: 30%–40% - Approximate cash levels DeVoe says his funds have held when opportunities were scarce Client retention: Two-thirds - Share of IVA launch assets that came from prior clients, indicating patience with the strategy Institutional preference: 80% / 20% - Rough split of clients preferring the current constrained/cash-heavy approach versus a fully invested version

Pivotal Quotes: "the true reason why value has not done well and why growth stock has to do with what I discussed earlier, these very low interest rates, the buybacks, the M&A, the lack of reversion to the mean. I think these are the true ultimate drivers. The rest is noise." — Charles DeVoe: Summarizing his core explanation for the value-growth performance gap "you only need to be rich once" — Charles DeVoe: Explaining why his firm prioritizes downside protection and avoiding large drawdowns "The upside being reversion to the mean from price to value." — Charles DeVoe: Describing the payoff structure of value investing and why buying at a discount matters

Implications: Listeners should expect value to remain challenged until rates, cycles, or market structure normalize. For investors, the episode argues for patience, selectivity, and paying close attention to downside risk, concentration, and whether today’s growth leaders are truly durable.