Optimism over a COVID-19 vaccine has pushed equity markets to new highs and also reignited performance of depressed “value” stocks and sectors. Media and analysts are quick to call this the “great rotation” back to value investing, suggesting that now is the time to reallocate portfolios away from growth tilts. While value has clearly outperformed this month, we remain more cautious on reallocating portfolios at this point, especially given value’s post-2008 track record and its significant underperformance to growth over the past decade.
Value investing has been tough for a long time
Before digging into the current environment and if this is the “Great Value Rotation”, let’s examine historical performance. The TL;DR – it’s been tough to be a value investor.
For the better part of the last 15 years (and in every year since the 2008 financial crisis), growth investing has outperformed value. Between low interest rates, persistent stimulus, increased emphasis on technology, and a decreasing reliance on brick and mortar, companies able to take advantage of technology and rapidly innovate have outperformed.
And not only have Growth companies outperformed their Value counterparts, but outperformed significantly. As of last Friday Growth has outperformed value by over 100% since 2008, creating a significant performance gap for value to make up.
To us, this begs the question of how significantly Value can outperform (if it does) going forward. Looking back historically, when Value outperformed Growth, it did so at a much lower scale than Growth’s outperformance. In fact, from 2006 – 2007 the cumulative outperformance of value was only 15% – compare that to the over 100% outperformance experienced today.
To some this highlights the concerns that the current rally is truly a bubble, but to others, this suggest a true paradigm shift in the economy and markets. We believe it’s more the latter, that markets and economy have experienced changes and are rewarding companies that can take advantage of them.
This leads to today and the “vaccine rally”.
The “vaccine rally”
Following the announcement of Pfizer’s potential COVID vaccine markets rallied sharply, with healthcare stocks and energy surging on hopes a post-COVID life. To date (as of 11/13), since the start of November the S&P 500 is up over 10%, the Dow nearly 13%, and the Nasdaq nearly 9%.
Similar to the rally off the bottom in March, this rally has boosted markets, but also favored specific segments. This time, the rally has specifically favored the Dow and “value” stocks that had failed to participate in the “quarantine tech rally”.
Highlighting this point take a look below at the Top 10 performing stocks in the S&P 500 in November vs. their YTD performance.
Value stocks are outperforming growth (and the broader market) so far in November, leading many to infer that this is the “Great Rotation” into value that analysts have been expecting post-2008.
To us, we think performance needs to be kept in perspective. While the performance of value has been strong in November, it also had a lot of ground to make up compared to peers, other sectors, and the broader market.
For comparison, the ten best performing stocks in the S&P 500 through October 31 2020, and their current YTD performance.
Clearly weaker performance in the post-vaccine rally, but YTD performance is still meaningfully above most “value bounce” stocks.
This dynamic highlights the key concerns of ours when looking at this rally and potential “value rotation”:
- Value investing has a lot of ground to recover. Even if this is a new era for broad value investors, these companies have significantly underperformed their growth counterparts. While they may outperform near-term, any investor that tried to jump on this “trade” early has likely underperformed.
- The post-Vaccine winners are hard to spot. Broadly speaking, many of these value companies were depressed for a reason. They failed to invest significantly in technology / R&D, their businesses haven’t innovated in years, and they sell a product that (in normal times) has stagnating demand. While the current rally is coming off depressed levels we think it’s harder to argue a case for future outsized growth in these firms vs. technology-focused innovating growth names.
What to do now?
To us, the relative outperformance of Growth vs. Value over the past decade, as well as the magnitude of it, suggest that it will be difficult for value to truly recover. And while the sentiment toward Value might be shifting, timing it perfectly will difficult.
Since 2008 Value has not outperformed Growth. It’s important to keep any Value outperformance in perspective – over allocating to Value has been a significant drag on portfolios. In our view a more disciplined approach to equity investing that focuses on thematic elements in the world and economy is likely to to lead to better long-term, consistent performance. And within that view, if Value stocks present then now might be a good time to invest.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
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A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.