Has the Value Spark Been Snuffed Out Again?
Value investors thought their luck was changing recently as cyclical stocks began to rally (helped by a rebound in the price of oil) as thoughts of a swift economic recovery from the COVID-19 crisis began to crystallise. However, that spark was quickly extinguished as the status quo of growth continuing to outperform value was quickly re-established, with the disparity between the two reaching levels not seen since the Tech Bubble. Reasons for growth's outperformance of value since 2007 are legend, and several of the arguments are re-examined in these papers.
This collection of papers revisits the question of when (or indeed if) value will come back into fashion, or whether the COVID-19 pandemic will have only strengthened the 13-year long dominance of growth, which has been predicated on several structural shifts. Changes to working, societal and economic behaviour, prompted by the pandemic, have seen digital transformation evolve at unprecedented speed and at scale. Widespread adoption and dependency of tech or digital-based solutions (online shopping, working from home, streaming services) may mean that value will remain unloved for a while longer.
In a new valuation framework, QMA relates valuation multiples to fundamentals and finds that changes in fundamentals affect value and growth stocks quite differently. Noting the extreme relative valuation differentials that exist between growth and value, they argue for a reversion to the mean.
Research Associates notes that certain parts of the market and strategies (including value) perform well in a recovery, irrespective of the cause of any market downturn, and that the value/growth dispersion is as wide as it has ever been.
OSAM notes the prolonged underperformance in value from 2007 and compares it to the period of 1926-41. They suggest that both periods equate to turning points in technological revolutions, where new ideas creatively destroy existing business models.
QMA’s CEO Andrew Dyson, muses about whether value has indeed died, or whether it is just taking a break after decades of outperformance.
Steven Chiavarone, Portfolio Manager and Equity Strategist, answers questions about value stocks, structural shifts to markets and the prospects for value investing in a low rate, recessionary environment.
Professor Damodaran involves himself in the value/growth debate and thinks that value investing needs to evolve if it is to get its mojo back.
This Research Affiliates paper dissects value into 3 component parts, suggesting that post-2007 underperformance is largely a function of growth stocks becoming more expensive, (partly a function of low yields) rather than anything ‘broken’ with the value metrics.
As economic recovery begins, Candriam warms of a possible rotation into value stocks. However, large tech companies dominate many growth indices, and their superior growth rates may have been further enhanced by COVID-19 induced changes to working, societal and economic activities.
StarCapital dissects some of the ideas behind value’s decline and the rise in growth over the last 13 years, arguing that a low growth, low interest rate environment is not conducive for value stocks. They suggest that value will once again have its ‘time in the sun’, though calling the turn is hard.
Michael Mauboussin dissects how investors actually value companies, noting that many ignore the underlying drivers of businesses and that value and growth distinctions may in fact be muddled.
JPM AM notes the dominance of growth stocks and the extreme valuation dispersion that exists between growth and value, questions how defensive some growth company earnings are and observes that a large part of many value indices comprise sectors with declining earnings (financials, oils).
This paper from Anchor Capital Advisors examines the outperformance of value over growth across many market cycles, then takes a deeper dive into the latest growth cycle.
For compliance reasons, this paper is only accessible in certain geographies
Franklin Templeton argues that due diligence is the only way to differentiate between ‘trapped value’ and ‘value trap’. They note that value and growth are not different investment strategies, as without growth, value creation rarely happens.
Baillie Gifford partner Tom Slater explains why growth stocks have fared better than value stocks during the coronavirus downturn. Some or all of the companies mentioned in this podcast may be investments in funds managed by Baillie Gifford.
S&P Dow Jones Indices looks at the key drivers of its Pure Growth Index outperformance, noting that overweighting IT (strong positive) and underweighting financials (strong negative) were the principal components driving performance.
Federated Hermes argues for the continuance of the growth investing style, driven by a low growth, low interest rate environment, continuing evolution and innovation by companies and shrinking product lifespans driven by technology.