Over the past five years, there has been an ongoing discussion about whether or not value as a style is still relevant. Since the financial crisis, growth has dramatically outperformed value in the low-growth, low inflation environment and long-suffering value investors have had to make do with subpar returns.
The question is, will this trend continue or will value recover?
A value recovery
Toward the end of last year, the style was starting to make a recovery with the Russell 1000 Value Index outperforming its value counterpart by just under 10% for 2016. Over the past 12 months, however, value has lagged and growth has overtaken the style. Over the period, the Russell 1000 Growth index has outperformed value by 8%. This performance means that over the past decade, the Russell 1000 Growth Index has returned a little under 100% compared to the Value Indexâs return of 33%.
Is value dead?
Value's terrible performance led analysts at Goldman Sachs to ask earlier this year if value investing is dead. Indeed, according to the bankâs analysis, the value-factor strategy of buying stocks with the lowest valuations and selling those with the highest would have returned -15% over the past decade. Goldmanâs report went on to claim the lackluster macroeconomic growth backdrop inspired investors to look toward growth stocks to provide outsized returns in a stagnant market. Specifically, the report noted:
âThe emergence of the âsecular stagnationâ and âlower for longerâ theses inspired investors to allocate especially large premia to stocks capable of generating their own growth, causing the outperformance of high-growth stocks at the expense of value.â
Nonetheless, the report then goes on to claim that while value might have lost its allure in the past decade, as long as humans remain irrational âsome degree of the value effect will persist.â
Irrational investors
The success of value investing has always depended on irrational markets and as long as humans are in control, markets will remain irrational.
It can be argued, however, that over the past several years markets have become increasingly controlled by machines, which is undoubtedly having an impact on value as a style. Whatâs more, there are now thousands of individual value investors and value screens (including quant funds) searching for the same equities. So while you can argue value will remain an attractive strategy for as long as humans remain irrational, you can also argue there are now an unprecedented number of rational value hunters who will not suddenly bail out at the first sign of trouble, a development that is bound to alter the performance of value over the long term.
Arguably, this is not something that is just affecting value. The market as a whole is being impacted by investorsâ understanding that over the long term, no matter what the current environment, equities will produce steady returns. More quantitative funds chasing investments with particular qualities have driven valuations higher, along with the insatiable demand for assets from passive funds.
Never the same again
Trying to argue value will ever be the same as it was in the days of Benjamin Graham or when Warren Buffett (Trades, Portfolio) started is impossible. The fact of the matter is there just are not the opportunities there were back then. Value has changed, there is no doubt about that, and you can argue that value, in its traditional sense, is indeed dead. It would take a sizeable economic or geopolitical shock to make the market drop by 30% to 40% today and offer the sort of deeply discounted opportunities value investors crave.
The dissemination of information over the internet has helped value investors, and indeed all investors, improve their processes. But the availability of information, specifically regarding undervalued equities and buy-and-hold strategies, could now be threatening value itself. It could be too early to claim value investing has died, but if other styles continue to dominate for another few years, it could become a distant memory.
