Value investing may not be a victim of the grim reaper, but the strategy’s certainly giving a convincing impression of a cadaver.
Jocelin Reed at AJO, a value-oriented investment shop in Philadelphia, points out in a recent note that buying big-cap US stocks that fall into the value bucket – priced at relatively low valuations – has been a dog relative to growth companies since the 2008 financial crisis roiled the global economy:
Growth stocks have outperformed value stocks for over a decade (Russell 1000 Value versus Russell 1000 Growth). That’s the longest period since the Russell Indexes started measuring!
A single chart tells value’s woeful tale. Using a starting point at the end of Aug. 2008, on the eve of the Lehman Bros. collapse that let loose the dogs of economic and market meltdown, value has been underwater relative to growth for all but a small fraction of the time.
Nine years and counting is taxing even the most patient of Ben Graham’s disciples, inspiring some pundits to wonder if the value strategy has finally met its match for all of eternity. Unlikely, but the case for arguing otherwise has obvious appeal these days.
There are several theories circulating for why value’s fallen out of favor for so long, but the main question that mystifies the crowd: When will the drought end? No one knows, of course, but after such a long run of underperformance one is tempted to think that the end is near.
As with so many other strategies that wax and wane through time, when the last believer throws in the towel that’s usually a sign that a revival is close. No one will ring a bell at such moments, but David Einhorn’s latest commentary may signal that value’s collapse for this cycle is complete. As CNBC reports this week:
Hedge fund manager David Einhorn, who’s become a billionaire by effectively identifying undervalued and overvalued stocks, is struggling right now and questioning whether the classic investing principles that made him will ever work again.
“The market remains very challenging for value investing strategies, as growth stocks have continued to outperform value stocks. The persistence of this dynamic leads to questions regarding whether value investing is a viable strategy,” Einhorn wrote in an investor letter Tuesday obtained by CNBC.
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Terms really should be defined. What is being used to determine “value” and what is being used to determine “growth”? Usually in these type studies “growth” is defined as the opposite of “value” is making them mutually exclusive.
Some measures of value are working better than others, so the definitions make all the difference. In this case, I think the index utilizes P/B as it’s factor, and P/B has not been working very well compared to other measures.
Quite right, there are many ways to define value and growth. The Russell version of value is defined by price-to-book; growth is defined using I/B/E/S forecast for medium-term growth (2-year) and sales per share historical growth (5-year) are used. Suffice to say that many investors think there are superior ways to define the styles. One version uses only rolling five-year return as a proxy. As for the Russell indices, you can dig into the details here:
Value strategies usually underperform under bull markets, this has been said and proven many times by highly respected practitioners of the value investing tent.
Paraphrasing Buffett: When the tide rises, everything goes up with it, many times irrespective of merit.
This has been undoubtedly a pretty long bull market.
I would not think for a bit that value strategies are dead. But that’s just me.
Value index funds (Russell 1000 Value, S&P 500 Value) have really struggled relative to the market (S&P 500) even after the 2007-2009 meltdown.
Active value managers have done even worse with few exceptions – Longleaf and Sequoia, to name two, are in the house of pain.
But “asset class” value investing has done quite well. Over the last 5 years, the Russell 1000 Value is +13.2%, the S&P 500 is +14.2%, and the DFA US Large Value Fund is +15.2% per year.
Value isn’t dead, it’s just that most investors are looking for it in the wrong place.
I started using a value formula in January 2012 with my Sep IRA requiring a stock to meet value criteria simultaneously on several different traditional value indicators out of five plus meet an indicator for financial stability. Slight difference but analogous for ETFs. About 60% foreign including some frontier. Getting 15.4% so far. Not world beating but not discouraging.
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