The Case for International Value

February 2024 – For Professional Investors Only

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International value stocks marginally led their growth peers across many regions during 2023. While value is certainly working for intuitive reasons, such as the high interest rate regime across markets, the cohort remains very attractively valued relative to growth. The price-to-book spreads between the cheapest and most expensive quintiles of stocks in non-US developed markets reflect just how far growth stocks ran up during the “easy money” years prior to the pandemic.

International Value Remains Cheap

Despite the strong performance of international equities in 2023, the valuation disparity between US and non-US equities remains wide. The broad US market is particularly expensive relative to the rest of the world, largely reflecting the well-documented rise of the “Magnificent Seven”¹ in 2023. The relative cheapness of international equities is currently at a historically rare level; on a forward earnings basis, the MSCI EAFE Value Index has only been cheaper than the Russell 1000 Value Index 3% of the time over the past 20 years.²

Deep Value Reigns Supreme

Given the compelling opportunity, we believe it is an excellent time to consider allocating to international value. Foregoing investment in non-US markets means passing over idiosyncratic opportunities in a broad investment universe consisting of over 1,500 companies. Additionally, despite a wealth of empirical evidence supporting its track record, some investors are reluctant to embrace value and instead turn to indexing or “value-light” strategies; such strategies may sidestep the most contentious and volatile stocks, but in so doing, sacrifice the core tenets of the value philosophy and the historical performance advantage of value.

The Pzena Advantage

We utilize our proprietary screening tool StockAnalyzer to identify the cheapest 20% of the investment universe, and we subsequently assign research priority to the most interesting companies from that quintile. At the conclusion of our research process, we have an educated estimate of normalized earnings, as well as a thesis for how company management could turn around the business. We build concentrated portfolios of undervalued businesses, which are typically experiencing issues we deem to be temporary.

We believe that our focus on fundamental research, paired with a disciplined process to uncover potential ideas across a broad universe, has contributed to the Pzena International Value strategy’s strong long-term performance.

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Footnotes
¹Amazon, Apple, Alphabet, Meta Platforms, Microsoft, Nvidia, and Tesla
²Source: FactSet, Pzena analysis