Value investors have had a rough decade.
For the past 10 years, the Russell 3000 value index has underperformed the Russell 3000 growth index by 3 percent a year, said Alex Bryan, Morningstar’s director of passive strategies research. Despite this, panelists at a Morningstar session on value investing said that this stretch of subpar performance is not a sign that value investing is dead.
Ronen Israel, a principal at AQR Capital Management attending the Morningstar Investment Conference in Chicago Thursday, said the 10-year underperformance does not make him question the value investing concept.
“There are different types of value measurements,” he said. “Value as a strategy, long term, is a good strategy. But it doesn’t make money all the time. It’s not unusual to have a period of underperformance like what we’ve just seen. You have to keep in mind these are long-term, good strategies and be willing to accept times of underperformance.”
There are strong economic drivers that make value investing work, he said. Some of those drivers are risk-based and some are behavioral. And he doesn’t see them going away.
“Ten years isn’t enough time to judge it,” Israel said.
John West, head of client strategies at Research Affiliates, said people are focused on having good short-term returns and less on the big picture, which makes it difficult to embrace value investing.
“People understand it; they believe in the value effect, but they just can’t follow through because they don’t want to report it to a fiduciary, [who might say] ‘You bought what? And it went down and you bought more?’ That’s a very difficult thing to do from a psychological perspective,” West said.
Jared Watts, a portfolio manager at Morningstar Investment Management, said the value premium is real, but the way of capturing it eludes a lot of investors.
“It’s proven to be more structural in nature. As long as fear and greed exists, there will be a value premium,” Watts said.