London-based ETP provider Source has announced the launch of the MSCI Europe Value Source ETF (EMSV GR), a fund designed to provide value-tilted exposure to the European equity market.
The ETF tracks the MSCI Europe Value Index, a subset of the MSCI Europe Index focussed on stocks that exhibit “value” – as opposed to “growth” – characteristics. The factors used to assess a stock’s degree of value include book value, 12-month forward earnings and dividend yield.
“Value investing has been popular since the 1920s,” says Source CEO Ted Hood. “This ETF allows investors to implement a European value strategy quickly and easily, while maintaining diversification and high liquidity.”
Value investing is an investment style that generally involves buying securities which appear undervalued relative to their intrinsic value, as assessed by fundamental analysis. This style of investing typically involves buying shares in companies that ideally trade at a discount to book value (or at the very least have low price-to-book ratios), have low price-to-earnings ratios and high dividend yields.
Statistical data suggest that value investing based on these criteria is a successful long-term investment strategy. Numerous studies have consistently found that value stocks outperform growth stocks and the market as a whole.
Perhaps the highest-profile proponent of value investing is Warren Buffett, the Sage of Omaha, who runs giant investment conglomerate, Berkshire Hathaway. Buffett’s adherence to value investing delivered an annual compound growth in book value of 20.3% to Berkshire Hathaway shareholders for the 44 years to 2009, according to a release by the company. In the last full decade (2000-2010), Berkshire Hathaway stock produced a total return of 76% versus a negative 11.3% return for the S&P 500 Index.
The MSCI Europe Value Index currently comprises 214 stocks, or around 50% of the free float-adjusted market capitalisation of the MSCI Europe Index, and has a significant 31.4% weight in financials, reflecting the low price-to-book ratios of European banks, compared to the conventional non-style-tilted MSCI Europe Index which has a 19% weight in financials.
The index’s top five holdings are HSBC (4.8%), BP (4.3%), Vodafone (4.1%), Novartis (3.9%) and Royal Dutch Shell (3.8%). The top five country weights are UK (26.6%), France (16.3%), Germany (13.8%), Netherlands (10.8%) and Switzerland (9.8%).
The launch of the MSCI Europe Value Source ETF is reflective of the increased interest in ‘smart beta’ ETF products. Smart beta (similarly referred to as factor-based or enhanced index) products track style indices in order to provide the returns associated with a particular strategy without the expense of active management. In Europe, Invesco Powershares and Ossiam are leaders in this field, specialising in fair-value and minimum-variance strategies, respectively.
The fund has a management fee of 0.35% per annum and is listed on Deutsche Börse. Rival products include the Euronext Paris-listed Amundi ETF MSCI Europe Value ETF (CV9 FP), also charging 0.35% pa, the slightly more expensive (0.40% pa) Deutsche Börse-listed DB X-trackers MSCI Europe Value TRN Index ETF (D5BL GY) and the London-listed fundamental-value focussed PowerShares FTSE RAFI Europe ETF (PSRE).