A ‘lost decade’ for value investing: but don’t bank on a comeback

Since the start of the recovery of US stock prices in 2009, growth stocks have been the place to be.  

Value or growth? It’s a debate that has consumed investors for decades. Growth investors scour the markets for businesses that have the potential to grow faster than the market, while value investing is the discipline of hunting for shares that have been mispriced by the market.

While it is wise for investors to have a mix of value and growth shares in their portfolio, the debate over which provides superior returns continues. So far this year, growth investing has come out on top. And while value is now seen as poised for a comeback, according to LPL Research, a US based firm, the case is not so certain, at least when it comes to the US.

Year-to-date the Russell 1000 Growth Index, which tracks shares that conform to the growth investing style, has returned roughly 9.5 per cent. By contrast, the Russell 1000 Value Index, which tracks shares considered to be value buys, has returned a mere 0.5 per cent.

Indeed, the past decade in general has been a miserable time for value investing, with growth shares consistently providing stronger returns. As a recent market commentary note by LPL Research notes: ‘Over the past 10 years, including the 2008–09, financial crisis, large cap growth stocks have outperformed value stocks by about 80 percentage points.’

As the chart below shows, since the start of the recovery of US stock prices in 2009, growth stocks have been the place to be.  



The research note also points out that the growth rally is the longest on record. And, as year-to-date returns suggest, this trend hasn’t started to reverse yet.

What’s the matter with value?

Growth’s continued outperformance is slightly odd. The current economic and financial climate should be boosting the performance of value.

For instance, strong US economic growth should be helping the performance of value shares. As LPL Research notes: ‘Accelerating economic growth has historically helped the value style, a condition that is in place today.’

The US is economy is estimated to have expanded by 2.2 per cent in the first quarter of 2018 and is predicted to grow by somewhere above 3 per cent in the second. However: ‘The growth style of investing has continued to lead the equity market higher,’ adds LPL Research.

Increase growth in earnings has also historically helped value shares. However, despite accelerating earnings over the previous two quarters, value has not seemingly felt a lift.

According to LPL, there are a number of reasons for this.

First of all, tech, a growth sector, has wiped the floor with every other sector. LPL Research points out: ‘Year to date, the S&P 500 Information Technology Index has returned over 14 per cent, well ahead of the S&P 500.’

There is a historical parallel here. In the late 1990s growth also outperformed value, despite the climate of strong earnings and economic growth. Growth’s outperformance also came on the back of technology’s strength.

Also acting as drag on value has been the tightening of monetary policy. This has acted as a drag on the high dividend paying areas within the value style, adds LPL Research, including real estate, telecom, and utilities.


Will growth continue to lead?

Growth’s continued edge depends on the continued strength of the technology sector. Despite some wobbles earlier in the year, recent weeks have seen investors pile back into the sector. Of course, how long this renewed tech rally will last is anyone’s guess. Valuations are stretched while the sector still faces regulatory risk.

The US industrials sector, mostly composed of growth stocks, are also set for continued strong performance. According to LPL Research this ‘increases in business investment may support the sector and support the growth style.’

At the same time, certain value sectors could see continued weaker performance. LPL Research points out that potential weaker oil prices could weight heavy on value shares in the future. Energy firms are firmly in the ‘value’ category. Should further production limits between OPEC and Russia be lifted, oil prices will start to go down again, hurting US energy producers.

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