Why value equities deserve a second look in institutional portfolios

Institutional investors worried about concentration risk in global equities may be looking in the wrong place for protection. Passive value indices, often marketed as a diversifier, still carry heavy exposure to the same mega-cap technology names driving that risk, according to Simon Adler, head of value equities at Schroders in London, which manages roughly US$18 billion across value strategies.

The case for active value investing, Adler argues, rests on a longer track record than most investors realize. For example, a $10,000 stake in value shares in 1926, held through every crisis, crash, and recovery since, would be worth roughly $2.5 billion today. Meanwhile, growth shares over the same period equate to roughly $150 million.

“It’s for people who like discounts, who like to buy things on the cheap,” said Adler. “Most people don’t do it because when you make a mistake, you look like an idiot.”

The strategy, Adler explains, is built on a simple principle: establish what a company is worth, then wait to buy it at a steep discount. Even if that means waiting for decades. He suggests most ideas that surface don’t survive closer inspection as the fundamentals don’t hold up, or the discount isn’t wide enough to justify the risk. He noted how his team only acts when the potential upside far outweighs the downside.

“We only buy the ones where there’s an asymmetric opportunity, when there’s a big hit available,” he said. “What makes the best returns is buying cheap shares when other people don’t want them. You buy the raincoat in the summer, and you buy your swimming trunks in the middle of winter then you patiently wait.”

That selectivity means ignoring the benchmark altogether. Rather than tracking the largest names in the index, Adler’s team focuses on what’s cheap on its own merits, drawing on a databank built over decades of recorded analysis. The returns, he acknowledged, are uneven as good years and bad years come with this particular investment strategy.

Where value fits in institutional portfolios

Adler sees value playing two distinct roles in institutional portfolios. The first is structural, as over long-time horizons, buying cheap and waiting has generated far superior compounding returns, which aligns with the growth mandates most pension investors are working toward.

The second role is more immediate. With equity markets heavily concentrated in the AI trade and mega-cap technology names carrying elevated valuations, the risk of a sharp drawdown is real.

Investors looking to diversify away from that concentration may assume passive value indices solve the problem, but Adler argues they don’t, particularly as products like MSCI World Value still carry significant exposure to IT and the Magnificent Seven, at valuations roughly three times what his team’s portfolios trade at.

True diversification requires active separation from those same crowded positions, said Adler.

While institutional investors say they want to diversify away from concentrated equity markets, Adler believes most of them aren’t following through.

"I don't think the complacency is in a lack of worrying. Everyone seems to be worrying. I think it's in a lack of action," he said. “Value is volatile. It's not good every year. It's not smooth. But you can't have it all. That's why value is important as part of a wider portfolio. We don't recommend people put 100 per cent in value. It's very, very powerful today as a diversifier and a long-term alpha driver.”

Inside the value investing process

Adler outlined the investment process, noting it starts with a global screen for the cheapest shares, then moves into deep fundamental work, pointing to 10- to 15-year financial models that trace a company’s profit and loss, cash flow, balance sheet, and accounting notes across good years and bad.

The goal, Adler said, is to determine what a business is worth through a full economic cycle using conservative assumptions, then weigh that against the risk of permanent capital loss.

Still, he acknowledged that most ideas don’t make it through. Even stocks that screen as cheap are rejected once the team digs in.

“No is the most important word in investment. You have to say ‘no’ a lot. We say ‘no’ most of the time,” he noted.

When a stock does clear the valuation hurdle, it goes through a group challenge, Adler noted, where a second investor builds an independent model, answers the same set of internal questions, and arrives at their own risk and reward assessment.

The named fund managers must reach agreement before anything enters the portfolio. Stocks that are rejected aren’t discarded because the team sets a revisit price. If the share falls to that level, an alert triggers a fresh review, Adler said.

Behind all of this sits an archive of more than 3,000 entries built over more than a decade, covering models, risk scores, screening data, and outcomes. That record allows the team to stress-test its own process. Whether profit estimates hold up, whether risk scores are predictive and whether buys outperform passes.

“Because we've recorded everything for more than a decade, we have evidence that we follow our process, that the process adds value, and that we're trying to improve,” Adler said.

Where value opportunities sit today

According to Adler, the opportunity set has broadened well beyond value’s traditional hunting grounds. He identifies cheap pockets across consumer discretionary, healthcare companies facing patent cliffs, advertising agencies, real estate, and construction.

Meanwhile, banks, oil and mining, all once a core value holding, have largely repriced.

Consumer staples stand out as an area where the market has overreacted. Established brands with century-long track records and strong franchises have been sold off as consumption patterns shift, partly driven by the rise of GLP-1 drugs, noted Adler.

To that end, he suggests autos present a different kind of opportunity - one loaded with structural headwinds including the rise of Chinese manufacturing, pressure on combustion engines, and the cost of transitioning to electric vehicles.

Yet even in a sector facing that level of disruption, Adler sees mispricing.

“You can buy stocks that have more cash than their market cap and no debt, in which case you’re paying a negative price for the business that’s making money,” he said.

What happens when value investing goes wrong

Yet Adler underscored the strategy carries obvious risk as positions can go to zero. When the market is right and the thesis is wrong, the pipeline doesn’t deliver, revenues fall, and the position loses money. Still, Adler expects one or two holdings each year that fail to recover, which he said is no different from the hit rate of any fund manager regardless of style.

But the difference is perception, he added, noting that when a value position goes wrong, the failure looks obvious in hindsight, and critics are quick to say they saw it coming.

Meanwhile, when a growth stock falls, the same loss is treated as bad luck rather than poor judgment.

"You have to be willing to lose money to make money," Adler said.

Ultimately, Adler argues that holding no value exposure at this stage of the cycle carries real risk. Additionally, passive products marketed as value don’t deliver what they promise because they carry too much overlap with the same concentrated positions investors are trying to escape.

“It is absolutely essential that people go active because the passive value indexes are not value,” said Adler.