Not all value investment approaches have struggled. There is a wide spectrum of value investing styles, ranging from deep value, to traditional or classic value in the middle, to quality value at the far end of the spectrum. Figure 1 highlights differences between a deep value manager and a quality value manager. This chart is a Skyline from Style Analytics and the zero line is the benchmark, in this case the Russell 1000® Value. Anything above that line means the manager has overweight exposure to a particular factor, and anything below that line means the manager is underweight versus the benchmark. Both managers presented are value oriented but the manager on the left employs a deep value style and you can see that this manager is extremely overweight all value characteristics. Conversely, the manager on the right is a quality value manager and is underweight all of the value characteristics versus their value benchmark.
Figure 1
The key here is that despite both managers embracing a value philosophy:
- their sub-styles and approaches are different,
- the portfolios can have very different characteristics, and
- these unique approaches can result in very different performance outcomes.
In Figure 2, on the Y axis we plot excess returns over the last 5 years for all managers in the U.S. large cap value universe. On the X axis we plot a proprietary value score for all these managers based on their holdings using a variety of value measures that combine balance sheet with income and cash flow statement metrics. Deep value strategies were more likely to have struggled and underperformed over the last 5 years. Conversely, if you were a quality value manager and had less of a value tilt, you were much more likely to have delivered excess returns.
Figure 2
R-Squared (R2) of a manager versus a benchmark is a measure of how closely related the variance of the manager returns and the variance of the benchmark returns are.
Legal Notices & Disclosures
The views expressed herein are those of Harbor Capital Advisors, Inc. investment professionals at the time the comments were made. They may not be reflective of their current opinions, are subject to change without prior notice, and should not be considered investment advice. The information provided in this presentation is for informational purposes only.
The information provided in this presentation should not be considered as a recommendation to purchase or sell a particular security. The weightings, holdings, industries, sectors, and countries mentioned may change at any time and may not represent current or future investments.
Past performance is no guarantee of future results.
The information shown relates to the past. Past performance is not a guide to the future. The value of an investment can go down as well as up. Investing involves risks including loss of principal.
The Russell 1000® Value Index is an unmanaged index generally representative of the U.S. market for larger capitalization value stocks. This unmanaged index does not reflect fees and expenses and is not available for direct investment. The Russell 1000® Value Index and Russell® are trademarks of Frank Russell Company.
