- We believe the current performance gap between growth and value represents what may be the most attractive investment environment for value stocks that we have seen in over 20 years.
- To us, it is a question of when — not if — a value orientation will pay off.
U.S. value stocks, represented by the Russell 1000 Value Index, significantly outperformed growth stocks, represented by the Russell 1000 Growth Index, from the top of the tech bubble (March 2000) through the market top that preceded the global financial crisis (October 2007). This edge vanished during what has since largely been a decade-plus of outperformance by growth stocks. Historically low interest rates, muted inflation, moderate gross domestic product growth and the explosive revenues of technology, social media, and internet retail companies have propelled growth stocks, leading them to large gains relative to value stocks.
Value, on the other hand, has performed so poorly over the past dozen years that only about 5 percent of previous dozen-year periods have been worse (defined as a two-standard deviation event), according to our analysis. With only a few short-term wins since 2008 and staggering overall underperformance, many investors have lost faith in value.
Yet, even with the past dozen years of significant underperformance, value still has outperformed over the long term as indicated by data from famed academic and author Ken French1 — which is why we maintain exposure to value stocks as part of our portfolio construction process.
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1 Data Library, courtesy of Professor Kenneth R. French. Tuck School of Business, Dartmouth College
Alpha source: Our strategies are designed to capitalize on long-term drivers of market performance through exposure to persistent sources of returns such as mean reversion, trend-following and stability. We have refined our approach to identifying these alpha sources and the factor groups we employ as proxies to measure and capture their performance.
- Momentum Alpha Source: The investment manager seeks to benefit from investor underreaction—due to anchoring. Such groups of stocks trend in price as perceptions change directionally and serially with incoming data, leading to herding behavior by investors.
- Stability Alpha Source: The investment manager seeks to benefit from investor tendency to undervalue lower-risk, higher-stability businesses—resulting from a focus on short time horizons and overconfidence in forecasts for momentum-driven stocks. Stability-oriented stocks have the power to exceed market expectations by consistently outperforming (rather than reverting to average market returns) and through the power of stable, long-term compounding.
- Value Alpha Source: The investment manager seeks to benefit from investor overreaction— resulting from aversion to loss. Such groups of stocks revert to the mean, as fear over the perception of the investment’s risk dissipates.
Book to Market Ratio: Stock’s book value divided by its capitalization, where book value is the value of an asset as it appears on a balance sheet, equal to cost minus accumulated depreciation. The value is the same whether the calculation is done for the whole company or on a per-share basis.
Price to Earnings Ratio: Equal to market capitalization divided by after-tax earnings. The higher the P/E ratio, the more the market is willing to pay for each dollar of annual earnings. Standard Deviation: Statistical measure of historical volatility. A statistical measure of the distance a quantity is lies from its average value. It is applied to the annual rate of return of an investment, to measure the investment’s volatility (risk). Standard deviation is synonymous with volatility, in that the greater the standard deviation the more volatile an investment’s return will be. A standard deviation of zero would mean an investment has a return rate that never varies.
The Russell 1000 Index includes 1000 of the largest U.S. equity securities based on market cap and current index membership; it is used to measure the activity of the U.S. large-cap equity market.
The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth values.
The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth values.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice.
There are risks involved with investing, including loss of principal. Diversification may not protect against market risk. There is no guarantee any strategies discussed will be successful. Index returns are for illustrative purposes only and do not represent actual investment performance.
Index returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company (SEI).