The Decline and Fall of Value

Steven Russolillo has an interesting article in today’s WSJ on the poor performance of value stocks. Value isn’t in a typical underperformance cycle. Rather, it’s been in a very long stretch of lagging the market.

Stocks that look cheap relative to traditional fundamental metrics such as profit or cash flow have fallen so far out of favor that Goldman Sachs in June questioned whether the markets are witnessing the death of value investing. With value investments in Europe and Asia also struggling, value funds globally are on track to post their worst performance this year relative to growth funds since before the financial crisis.

The struggle for value stocks over such a prolonged period contradicts the popular investment approach coined by financial analyst Benjamin Graham, known as the father of value investing, and since popularized by Warren Buffett. The billionaire investor and Berkshire Hathaway Inc. chairman has attracted a legion of followers who remain confident that value investing will never go out of style.

(…)

Over the past decade, the performance of U.S. growth stocks has been almost three times better than that of value stocks, contributing to what index fund giant State Street Global Advisors calls “the longest period of underperformance for value since the late 1940s.”

One of the problems, I suspect, is that the composition of value has changed. Since the financial crisis, many banks have been pushed into the value bin since they have very low price-to-book ratios. Properly speaking, I doubt many of these beaten-down financials behave as what I think of as value, meaning high-dividend yields. I can’t be positive this is what’s happening, but I’m guessing it’s an issue.

Here’s the S&P 500 Value divided by the S&P 500. Note that the cycle peaked in 2007 right with financial stocks.

Posted by on August 7th, 2017 at 10:56 am


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