Widespread Rallies Have Left Little Opportunities for Bargains
Widespread rallies across the major asset classes in recent history have left few opportunities for bargains in the waning days of 2020.
The main exception: energy and certain slices of the commodities markets. Otherwise, the catch from deep-value fishing is light, based on 140-plus exchange-traded funds covering stocks, bonds, property shares and commodities on a global basis.
The concept of value investing has been on the defensive in recent years, thanks to relatively weak performance vs. expectations promoted by the long-run track record. Debate rages about whether this corner of portfolio strategy – favoring assets that appear to trade at discounts to some measure of inherent worth – has run out of road. The harshest critics warn that buying assets on the cheap and expecting to earn a relatively high risk premium for the effort is past its shelf life. Hogwash, counter value’s true believers. A periodic dry spell for the strategy is par for the course and so the glory days will eventually return. Patience is the price of doing business. On the basis, overweighting the value factor will continue to deliver for portfolio design and asset allocation.
Or so we’re told. While we’re waiting for Mr. Market to render judgment, let’s inspect the wares by ranking value opportunities (or the lack thereof) via a performance lens. The metric of choice for “deep value” in this column is the 5-year return, which is based on an idea outlined in a paper by AQR Capital Management’s Cliff Asness and two co-authors: “Value and Momentum Everywhere,” published in a 2013 issue of the Journal of Finance. There are numerous value metrics and so no one should confuse the 5-year-performance benchmark as the definitive measure of bargain-priced assets. But as a starting point in the process of identifying where the crowd’s expectations have stumbled, the 5-year change is a useful metric.
One advantage of using a 5-year performance measure: It can be applied over a broad set of assets, thereby leveling the playing field for evaluating this risk factor. Another plus: this metric is simple and therefore immune to estimation risk, which can complicate accounting-based value gauges, such as price-to-book and price-to-earnings measures. In short, the 5-year return is a handy tool as a first approximation for identifying ETFs that appear to be deeply discounted by the crowd, which may indicate relatively high expected returns via the value proposition for investing.
Alas, there are no guarantees that value, no matter the definition, will generate superior performance anytime soon, if ever. Recent history certainly leaves plenty of room for doubt. The good news: kicking the tires is a risk-free proposition.
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The ranking below covers 143 exchange-traded products that run the gamut: US and foreign stocks, bonds, real estate, commodities and currencies. You can find the full list here, sorted in ascending order by annualized 5-year return — 1260 trading days — through yesterday’s close (Dec. 21, 2020). For additional perspective, here’s the previous ranking (Aug. 20, 2020).
The first cut: ranking the major asset classes. Notably, red ink is no longer on the list. Value for this broadest of top-down reviews has transformed to relatively low gains. By that definition, a broad measure of commodities (DJP) – an exchange-trade note – is the weakest performer over the past five years. At the opposite end of the valuation spectrum: equities the world over, led by US shares (VTI).
Finally, let’s turn to the deepest losses (discounts) for the full list of funds. Echoing past updates, oil and gas (shares and raw commodities) are posting the deepest shades of red. At the bottom is SPDR S&P Oil & Gas Equipment & Services ETF (XES), which has lost an annualized 22.3% over the trailing five-year window. Depending on your perspective, XES’s hefty fall from grace is an extraordinary opportunity – or a warning sign to steer clear.