The long-run historical return premium linked to value stocks remains intact if you’re measuring performance across decades, but the strategy of favoring inexpensively priced shares has had a rough run lately.
Let’s begin with some long-run perspective, using 1996 as a starting point and Russell’s (NYSEARCA:IWM) large-cap US equity indexes as benchmarks. Value stocks (Russell 1000 Value) earned a modest premium over growth (Russell 1000 Growth) during that stretch, but it was slightly behind the market overall (Russell 1000). That may say more about the value factor in the large-cap space (or the design of Russell’s indices) rather than the merits of value investing generally, but that’s a topic for another day.
Meantime, consider the recent trend (year-over-year changes) for value vs. growth. The Russell 1000 Value Index is currently in its deepest hole vs. its growth counterpart in more than eight years. Comparing the one-year return spread (based on 252 trading days) for the two indexes reveals that value is trailing growth by nearly 18 percentage points – the biggest gap since late-2009.
For another view, let’s turn to the daily cumulative changes in value less growth since 1996. In the chart below, rising numbers equate with value outperforming growth; when the index is falling, value’s taking it on the chin in relative terms. Using this data as a gauge, it’s clear that value’s headwinds have been blowing stronger recently, given that the index is currently at its weakest reading since 2001.
The numbers above may not be the last word on the value factor since there’s a wide array of methodologies in this corner for identifying stocks that are trading at a bargain. There’s also room for debate about whether fishing in the US large-cap equity pool is nirvana for value, particularly these days. But if we’re using the Russell 1000 yardsticks as a gauge, value has taken a beating lately.
But some analysts see opportunity arising from value’s recent turmoil. David Green, a co-manager of Hotchkis & Wiley Value Opportunities Fund, thinks the outlook for rising interest rates and hotter inflation will favor value investing going forward. Not exactly a shocking forecast from someone who’s day job is running a value fund.
In any case, Green advises it’s time to think positively. “If interest rates go up, the stocks that will be hit the hardest are growth stocks because they are longer-duration stocks,” he tells MarketWatch, referring to a fixed-income concept related to interest-rate sensitivity and applying it to stocks. “This is an inherent risk in growth stocks that people are not appreciating. This is something that could ultimately unravel the growth bubble.”