Value
Long before factors were discovered, value investing was rewarding investors with excess returns. Benjamin Graham shared the concept with readers of his books Security Analysis and The Intelligent Investor. Warren Buffett put it into practice for the public to see.
It may be the first and oldest factor, but value is experiencing an extended bout of underperformance. “A lot of people are wondering if value is dead,” Plancorp’s Lazaroff says.
After President Trump was elected with promises to rebuild smokestack America, many people thought that value would start to outpace growth. It came close in 2017 but has not kept up with most other factors or the major indexes since then.
In an age of disruption, many once profitable industries are under siege from upstarts. Executives at active investor T. Rowe Price have suggested value could continue to struggle given the secular transformation some believe is coming in the next decade.
“The challenge for value today is that it is dominated by financials and energy,” says Emily Roland, head of capital markets research at John Hancock Investment Management. If one likes value now, she says they need to believe that energy prices will appreciate and banks can grow profits in a low-interest-rate world with an inverted yield curve.
Still, throwing in the towel on a strategy that has outperformed growth for almost a century seems myopic. Mark Balasa, Lazaroff and many other advisors believe that most growth stocks are seriously overvalued. Hunstad says institutional investors seeking downside protection are looking closely at value today.
What’s striking is that over the 10 years ended July 12, value actually produced solid gains that might have left investors quite satisfied in another decade. BlackRock’s large-cap value ETF, labeled IWD, has returned 12.98% versus 16.06% for IWF, its large-cap growth ETF. (These ETFs are designed to track the Russell 1000 large-cap value and growth indexes, respectively.)
Recent history also shows that when value shines it can be powerful and offer protection. Rarely was this more obvious than in the years 2000 to 2004, when the tech bubble popped and the market punished profitable high-growth companies with almost the same vengeance it did bogus dot-com stocks.
“When value outperforms, it outperforms by a wide margin,” Invesco’s Nguyen says. “It’s hard [for people] to see that today.”