AI's unexpected effect on "Value"

hallmark

I hold Ishares World value factor (IWVG) and USA value factor (IUVD)

They've done good, up 60% & 80% respectively since I bought them < a couple year ago.

However, reviewing a few items in the portfolio last night I realised why. Micro represents an eye-watering 14% & 21% respectively.

FWIW they now have a less than impressive yield too, the USA fund is 1.19% which is not really my idea of value :)

So, much as I dislike being lured into tinkering I think I'll offload these as I certainly wouldn't buy them today with that profile.

I'll probably replace them with more VHYL or a new position in LDGG, both of which still look reassuringly boring.

Linton

1. Microsoft is a very solid company that is not betting the world on AI.
2. "Value" means that it has current profits to justify its current price. The opposite is Growth which is priced on future prospects. High dividend companies tend to be "value", but Value companies may or may not pay high dividends.
3. You wont get high dividend yields from the US (without a bit of magic) as it is more tax advantageous there for companies to use excess cash to buy back their shares.

aroominyork

It's not Micro or Microsoft. It's Micron Technology. Its price has risen from under $100 last summer to around $1000 now. The next reassessment of the ETFs' constituents might see its proportion of those funds shrink.

hallmark

Yes sorry Micro was a typo should have said Micron (I knew it wasn't Microsoft).

I know value doesn't unequivocally mean high divs but I think, or at least expect (perhaps incorrectly?) that a value fund will tend to deliver dividends that are at least on the "high" ish end of the scale. High meaning at least something more like 2%+ if it's usa/global. As it's a reasonable part of why I'd buy a value fund in the first place. If I'm going to get a yield of 1% I'd probably just choose a straight S&P500 tracker & at least expect to get all of the gains if tech continues to dominate.

(if that rather rambling reply makes sense!)

masonic

There are dividend/income focused ETFs you could hold if that is what you want. Value investing primarily has a capital gain focus because it selects companies that the "voting machine" that is the market has beaten down. The hope of the value investor is that the market is wrong and the share price will rise. Whereas the income investor selects based on forward yield expectations rather than share price valuation.

But before discarding the value ETFs, it might be worth sense checking the yield, given Micron dominates, and has gone up over 700% in one year, it's own dividend yield is rather misleading.

InvesterJones

You should always know what your fund/index contains, certainly, though if constituents no longer meet the criteria they should be booted out at the next refactoring point.

Linton

https://forums.moneysavingexpert.com/discussion/comment/82112127#Comment_82112127

I agree that you should always check your chosen funds' constiutents. This is particularly important with simple factor-based index funds where blindly following the index rules can give rise to investment allocations which would not be chosen by a prudent human investor. Or as possibly the case here, the index is not a good match for what you actually want.

Bostonerimus1

Tech is 40% of the S&P500 and companies like ASML, Nvidia and Samsung etc are starting to dominate outside the USA. The boom in AI and tech has influenced value companies in real estate, financial services, construction, industrial machinery and utilities because of the money being borrowed and spent building infrastructure. It will do that on the way up and the way down.

aroominyork

https://forums.moneysavingexpert.com/discussion/comment/82112116#Comment_82112116

Yes but… there is an overlap between value and dividend yielders. They are mature, cash-generating sectors like banks, energy and computer staples that successfully plod on, making reliable profits but with no pretensions of changing the world but just of eking out a little more market share and increasing their margins. That means they are 'not growth' and, especially in a bull market, may be underpriced compared to the market average. The metrics therefore push them towards the value basket.

masonic

https://forums.moneysavingexpert.com/discussion/comment/82112489#Comment_82112489

You're right that there's a big overlap in the Venn diagram of value and income right now, largely because a long bull market in growth/tech has left boring, high-dividend sectors trading at relative discounts. However, that overlap shifts across market cycles. Value indexes screen for fundamental cheapness, not yield. When the market regime turns, the value basket can end up looking completely different from an income basket.

That is perhaps a risk that the OP wouldn't want. That, and the fact that some of the other stuff in the value basket will be "cheap" due to structural weakness rather than temporary mispricing.