This is a summary of our latest commentary. To access the full paper — including exhibits — please complete the short form at the bottom of this page.
- Growth stocks have led the market for more than a decade
- We believe value stocks are a bargain right now
- To us, it is a question of when — not if — a value orientation will pay off
We think value stocks are a bargain right now. The Russell 1000 Growth Index is nearly 50 percent more expensive and offers only slightly more expected earnings-per-share (EPS) growth than the Russell 1000 Value Index. And 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 nearly 20 years.
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). They lost their edge during what has been a decade-plus of outperformance by growth stocks. Historically low interest rates, soft inflation, moderate gross domestic product growth and the explosive performance of technology companies have propelled growth companies in their rapid ascent in the past two years.
When will value win?
Everyone wants to know when (and how) value will return to favor.
The short answer is that value trades are hard to time. Nobody knows what will trigger the change or when it will happen. What we do know is that, when change comes, it often comes quickly. The way to make sure you don’t miss the move is to invest your money and wait. Patience and discipline are required when it comes to value investing.
Our portfolio construction is not based on market timing. We think trying to perfectly time trades to capture turning points in the market is pointless.
Instead, we make our decisions based on where we believe it makes the most sense to invest next. At this late stage of the bull market, we find growth stocks expensive. Most of our portfolios are well diversified and not solely dedicated to value strategies. Yet we prefer value stocks right now because we like their lower prices.
Value-oriented companies tend to be smaller than growth-oriented companies from a capitalization perspective because their stock prices trade at a discount (in terms of their estimated fundamental worth relative to the broad stock market). Investing in smaller companies is also a hallmark of active fund management, and our portfolios certainly show smaller-sized holdings than their benchmarks.
From a sector perspective, our most prominent overweight tends to be in the financials sector. These companies generally appear fiscally healthy and offer low prices and rising dividends. On the other hand, high-flying technology stocks are expensive, so we’re avoiding them. Utility companies (a traditional value sector) also cost too much, which makes them unattractive right now.
We’re sticking with value
Most investors believe buying low and selling high will generate long-term gains. But buying stocks when they’re down tends to feel unnatural and uncomfortable. We know investors are losing faith in value. Just a reminder: value investing should reward patience. We stand by our research that value outperforms the broad stock market over the long term.
That’s why we plan to maintain our stance until a shift in market sentiment returns value to favor—which, in our opinion, is inevitable.
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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.
Glossary of Financial Terms
Earnings per share: Earnings per share (EPS) is the portion of a company's profit allocated to each share of common stock. Earnings per share serve as an indicator of a company's profitability.
Growth stocks: Growth stocks exhibit steady earnings growth above that of the broader market.
Value stocks: Value stocks are those that are considered to be cheap and are trading for less than they are worth.
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 and is intended for educational purposes only. There are risks involved with investing, including loss of principal. Diversification may not protect against market risk. Index returns are for illustrative purposes only and do not represent actual fund 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. Neither SEI nor its subsidiaries is affiliated with your financial advisor.