The Power of Value Investing: Exploring the CI Value Index ETF lineup

You would be hard-pressed to find an Investor, novice or experienced, who has not heard of Benjamin Graham. The Father of Value Investing, as he is affectionately known, first developed the idea in the late 1920s, and introduced it to the world in 1934 through the classic text Security Analysis, co-authored with his protégé, David Dodd.

Over the decades, Value Investing has stood the test of time through multiple market cycles and garnered many proponents, the most notable of which is Warren Buffet, widely considered the most successful investor of all time.

What is Value Investing?

Value Investing relies on the premise that financial markets are not entirely efficient, and do not price in all available information about an investment. This creates opportunities for savvy investors to find companies that trade below their intrinsic value, invest in them, and sell their investment once the value has reached or surpassed their calculated intrinsic value.

Finding the intrinsic value of any investment is often easier said than done, with many variables and financial ratios that need to be taken into consideration. There are a few key factors and components that must be taken into account when determining whether an investment provides good value or not.

1. Risk-free interest rates: This is the rate of return provided by securities considered to have no risk associated with them, which are usually government bonds or Treasuries. Because the chance of a government not paying its debt is close to 0, they are often used as the benchmark to which all other investments are compared to. The higher the risk-free rate, the more attractive the bonds are versus any other equity investment. Therefore, the intrinsic value of equities is lower (since they will always be riskier), and a Value investor will require a much lower price before they consider buying.
   
   
2. Dividend Yields/ Free Cash Flow: The same way that government bonds pay regular interest, some equity investments also offer regular payments through Dividends. Although these are not guaranteed and often subject to the company’s own financial situation, a steady and growing dividend adds to the intrinsic value of an equity investment. Some companies, however, choose not to pay dividends despite being in the financial position to do so. They may do this for many reasons, but investors can still assign value to them by looking at their Free Cash Flow, which shows how much they could pay out in dividends if they chose to. Because the FCF can be utilized to either buy back shares or issue dividends, it also adds to the intrinsic value of the investment.
   
   
3. Valuation Ratios: One of the most common ways of valuing a company relative to its peers, or to its own historical valuation, is through the use of valuation ratios. The 2 main ratios Value Investors use are the Price to Earnings (PE) ratio and the Price to Book (PB) ratio. Although each ratio measures a different element of the company’s valuation, generally a lower ratio is better than a higher one when compared to peers or the company’s own history.

The list above is by no means exhaustive, and there are many other nuances to determining the intrinsic value of an investment. For this reason, the investment valuation is better left to investment professionals and money managers with the resources and training required to analyze them.

The CI Morningstar Approach

As with any investment strategy, having a sound process for security selection is paramount for the success of the portfolio. Given the highly technical nature of finding the perfect blend of inputs that determine an investment’s true intrinsic value, our approach is based on a robust methodology and implements both historical and forward-looking value metrics, as per the Morningstar Risk Model:

This intuitive methodology aims to capture the main factors involved in determining the value of an investment, by looking at multiple characteristics of a selected investment.

Following this logic, the Price / Earnings input is weighted the heaviest due to its relatively high importance in determining the relative value of an investment. Inputs such as Dividend Yield and Price / Cash Flow are meant to capture value added by a consistent payout or the potential payout provided by the company’s regular operations. The Price / Sales ratio is often used to value fast-growing companies that may not yet have positive earnings but may still be considered Value investments. Finally, the Price / Book value of a company is used to assess capital-intensive investments, usually found in the Banking and Industrials sectors.

Collectively, these inputs cover the most important factors used in Value Investing.

Our Value ETFs

Value can be found in any market if one looks hard enough. At times, it may be found in corners of the U.S market such as Financials or Industrials. Other times, the value may be found in Energy or Materials sectors, usually associated with the broad Canadian index. Lastly, value can also hide across the oceans in international markets.

With the CI Morningstar Value ETF suite, investors can capture the benefits of Value Investing wherever it decides to hide, through our well-established domestic and international products:

• CI Morningstar Canada Value Index ETF (ticker FXM)
• CI Morningstar US Value Index ETF (ticker XXM for CAD-Hedged; XXM.B for Unhedged)
• CI Morningstar International Value Index ETF (ticker VXM for CAD-Hedged; VXM.B for Unhedged)

With close to a century of performance history, Value Investing has stood the test of time through its ability to pick up underappreciated investments in times of market turmoil and has been the go-to strategy of other renowned investors like Warren Buffet. Investors looking to gain exposure to Value Investing may consider our suite of Value ETFs.