This Value Rebound Appears to Be Just Getting Started

By: John Alberg and Michael Seckler

A year ago, we shared an analysis that examines the cycles of buying inexpensive (VALUE) companies versus expensive (GROWTH) companies. Since then, value strategies had a strong 2016. We have now updated these charts with data through year-end. We believe this lens remains particularly relevant, as it seems that we are now emerging from the longest period of growth stock dominance since World War II.

The returns above [1] reflect the trailing five-year annualized return of a hypothetical portfolio (the value vs. growth portfolio) that goes up when value stocks are outperforming growth stocks and down when growth is outperforming value. In this case, we look at the relative performance of the 20% least expensive (VALUE) companies in relation to the 20% most expensive (GROWTH) companies. All returns are compounded monthly.

The chart shows that value outperforms growth across most five-year periods. In fact, it does so by roughly 5% annualized over time. However, since World War II, there have been six distinct periods when growth outperformed value on a trailing five-year compounded return basis. We have recently been in one of these periods, the prior one occurring during the dot-com era.

Therefore, it is of great interest to examine how value has previously performed following similar times in the past. This chart provides a perspective.

During the previous five periods when growth outperformed value, value subsequently delivered very strong results over the subsequent five-plus years. In the current cycle, the value rebound appears to be just getting started.   

For continued reading, consider exploring some other recent, related perspectives:

  1.   Barron’s - Value Investors, Relax – “Don’t worry, though, the value trade is hardly dead yet. Our confidence starts with the value rally’s youth.”
  2.   Pzena – Q4 2016 Newsletter – “Pro-value cycles are long and durable. Spreads are still wide, setting the current cycle on a path remarkably similar to past cycles.”
  3.   Bloomberg – Value Investing Hits Back – “The question now is whether 2016 is the start of value’s comeback or merely an isolated round of good fortune. If you believe that investing styles like value and growth are cyclical, then there’s good reason to believe that value is just getting started.”

[1] Historical results represented herein are for illustrative purposes only and are not based on actual performance results. The hypothetical portfolio and the associated returns do not reflect the effect of transaction costs, bid/ask spreads, slippage, or management fees. Historical results are not indicative of future performance.

All results and the analysis described in the above post exclusively used data obtained from Kenneth R. French’s research data library. To construct the hypothetical set of returns herein, we used this particular data file. This dataset contains the returns of 25 portfolios. The portfolios, which are constructed at the end of each June, represent the intersections of five portfolios formed from size (market equity, ME) and five portfolios formed from the ratio of book equity to market equity (BE/ME). 

In our analysis, we constructed a hypothetical portfolio (the value vs. growth portfolio) that goes up when value stocks are outperforming growth stocks and goes down when growth stocks are outperforming value stocks. We calculated the monthly returns for the value vs. growth portfolio to be equal to the average of the five high BE/ME portfolios minus the average of the five low BE/ME portfolios in the dataset referenced above. All returns in our analysis are compounded monthly.