Value strategies are surpassing growth funds so far in 2019, data from Hedge Fund Research showed Monday, affirming investors who think purchasing stocks trading below intrinsic value beats buying glamorous growth stocks at premiums.
The ascendance of tech stocks like Netflix (NFLX, Financial) and Amazon (AMZN, Financial) trading at huge multiples to earnings in recent years has called into question the strategy founded by Ben Graham and employed by many profitable investors, such as his pupil Warren Buffett (Trades, Portfolio) and Baupost Group’s Seth Klarman (Trades, Portfolio). Easy monetary policy, low interest rates and optimism about future earnings have all been blamed for value’s underperformance and perhaps demise.
“Looking at the past decade, the core of the problem has been the response by central banks to the global financial crisis,” Putnam Investments portfolio managers wrote in its third-quarter equity outlook. “The market was flooded with liquidity, which encouraged investors to move higher on the risk curve, sending them out of value and into growth. As growth became a scarce commodity, investors were willing to pay up for it, even when multiples reached extreme highs.
Hedge funds using value strategies have fared better in 2019, though. They returned 8.71% on average for the year through August, surpassing the 7.51% gain of hedge funds focused on growth stocks, Hedge Fund Research reported on Monday. The S&P 500 index advanced 16.9% for the period.
The HFRI Fundamental Value Index rose five of the first eight months of the year and outpaced the HFRI Fundamental Growth Index in five of the months. Growth slipped past value in August, falling 2.36% for the month. The value index ticked down 2.44%, the worst performance of any equity hedge category.
A return for value stocks would spell a strong shift for the market. Investors have watched the Russell 1000 Growth ETF (IWF, Financial) return 16.06% on average annually over the past 10 years of bull market, while the Russell 1000 Value ETF (IWD, Financial) offered an average gain of 12.98%. But in the past five trading days, indexes have swapped places too. The growth index tumbled to return only 1.16%, falling below the value index’s 3.83% jump. Thursday was the first trading session in which value surpassed growth since the final week in May.
S&P 500 stocks advancing the most on Tuesday included some of the worst performing names of 2018. Mohawk Industries (MHK, Financial), which suffered the third-biggest decline last year, gained 3.8%. Fourth-worst performer Affiliated Managers Group Inc. (AMG, Financial) rose 4.01%, and seventh-biggest decliner Invesco Ltd. (IVZ, Financial) leaped 3.84%.
The transition to value could have to do with investors’ expectations for interest rates and a turn toward safer investments after years of paying up for momentum, Bespoke Investment Group said Tuesday.
“Part of this was a function of rates, with recent upticks in short and long term interest rates driving utilities and other defensive stocks with strong trailing momentum lower, while banks rallied,” Bespoke analysts wrote. “But it was broader than that too: software got smashed while oil & gas stocks surged, automakers ripped while stable consumer staples names took a hit, and the market generally reversed all of the trends it has been operating on so far this year in a massive stop-out of successful (up to now) trading strategies.”
While a return to value could boost returns for managers focused on the stocks, many value investors are quick to note that value has beat growth over the long term. Hedge funds focused on the stocks have beaten growth-oriented hedge funds in seven out of the past 10 years, Hedge Fund Research data shows. The 10-year average return for value hedge funds was 73.77%, compared to 52.34% for growth. The Russell 1000 Value ETF also returned 6.76% annually since its launch in 2000, eclipsing the 4.88% average return of its growth counterpart.
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