So why has all the angst around value eluded junk? An obvious answer is recency bias: Bond investors have been rewarded for buying junk in recent years, whereas stock investors have been punished for buying value—and nothing makes investors more contemplative than underperformance or less curious than outperformance. While the Bloomberg Barclays U.S. Corporate High Yield Index outpaced the Bloomberg Barclays U.S. Corporate Bond Index by 1.6 percentage points a year from 2007 to 2019, value underperformed growth by 4.4 percentage points a year during the same period.
A more subtle answer is availability bias: The premium is harder to discern for value than for junk, so it’s easier to wave away. With junk bonds, it’s a simple matter of comparing yields. For example, the yield for the high-yield index is 5.6%, compared with 2.6% for the corporate bond index, or an expected premium of 3 percentage points.
For value stocks, the least amount of effort probably entails calculating a ratio of earnings to price, which would yield 3.3% for the Russell growth index, based on 12-month trailing earnings per share, and 5.6% for the value index, or an expected premium of 2.3 percentage points. A more detailed gauge would typically consider variables such as dividend yields, expected earnings growth and anticipated changes in valuation—far more sweat and guesswork than glancing at bond yields.
There’s no shortage of postmortems about value, but it’s not clear why value alone is marked for extinction. What is clear is that, like the junk premium, value has been known to vanish for long periods before reappearing. Investors who think it’s gone for good should wonder what else in their portfolio is on the chopping block.
This article was provided by Bloomberg News.