{"id":480,"date":"2016-04-13T12:08:35","date_gmt":"2016-04-13T19:08:35","guid":{"rendered":"https:\/\/chaltenadvisors.com\/blog\/?p=480"},"modified":"2016-04-13T12:08:35","modified_gmt":"2016-04-13T19:08:35","slug":"are-value-stocks-finally-poised-to-outperform","status":"publish","type":"post","link":"https:\/\/chaltenadvisors.ca\/blog\/are-value-stocks-finally-poised-to-outperform\/","title":{"rendered":"Are value stocks finally poised to outperform?"},"content":{"rendered":"

Index investing means taking\u00a0an automated or rules-based approach to constructing and managing a portfolio compared to\u00a0active investing\u00a0which\u00a0relies on a portfolio manager’s judgement to manage the\u00a0portfolio. \u00a0There are many ways to implement an index approach. \u00a0Most index funds follow a commercially published index like the S&P\/TSX 60 in Canada or the S&P500 in the US. \u00a0The individual securities represented in these indices are usually weighted by\u00a0their market capitalization. \u00a0Other approaches, while still very structured and systematic, try to weight the\u00a0portfolio\u00a0towards other “factors”\u00a0that might yield returns higher than a simple market cap weighted index. \u00a0For example research has shown that tilting an index towards smaller companies, cheaper companies or more profitable companies is likely to yield higher returns over time.<\/p>\n

There has been a large increase in the number of these factor-based structured portfolio\u00a0strategies in recent years. \u00a0One factor that has commonly been used for decades is the value factor, essentially tilting a portfolio\u00a0towards stocks with lower market valuations based on metrics like the price\/earnings (P\/E) ratio or the ratio of the book value to the market value of the stock. \u00a0While the concept of value investing has been around for nearly 100 years and goes way back to the time of Benjamin Graham and David Dodd, original research published\u00a0in 1992 by Eugene Fama & Kenneth French revealed the value factor to be systematically helpful and indeed index strategies developed since then have proven the research to be correct. \u00a0A recent Morningstar article<\/a> highlights that the Russell 3000 Value Index of US stocks outperformed the Russell 3000 Growth Index on average by 1.27% annually between 1978 and 2016. \u00a0But look at the graph below:<\/p>\n

\"Value<\/p>\n

What happened to the value premium over the last 10 years? \u00a0Have too many “smart beta” funds gotten wise to the idea and are now inflating the price of value stocks? \u00a0Has something changed in the structure of the markets? \u00a0While often investment strategies don’t quite tend to deliver the same performance shown\u00a0in academic studies when actually put into practice, the value premium is one that has persisted for a long time. \u00a0The reason it’s been able to persist and why other factors are able to persist is that they represent not only higher return but higher risk. \u00a0Risk and return are linked closely and there is no free lunch with any of these factors. \u00a0In order to benefit from factor returns over time, you are going to have to deal with periods of underperformance, sometimes painfully – that is the risk side! \u00a0Now you don’t normally expect to see 10 years of underperformance but it’s not unheard of. \u00a0It’s very difficult to try to time factor performance. \u00a0Turnarounds can happen very quickly and returns to factors can accumulate over short periods of time – you have to stay the course to win. \u00a0After 10 years it appears many aren’t willing to stay the course as the following chart from Morningstar shows – fund flows seem to indicate\u00a0that value investors may be\u00a0capitulating.<\/p>\n

\"Value<\/a>\u00a0But isn’t this\u00a0exactly the scenario that sets value up to outperform? \u00a0Investors flee because they can’t bear the risk, leaving value stocks cheaper than ever. \u00a0What’s happened since the beginning of the year? \u00a0The Russell 3000 Value and Growth Indices have been running neck and neck with a slight edge to Value. \u00a0It will be interesting to keep watching this one.<\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

Index investing means taking\u00a0an automated or rules-based approach to constructing and managing a portfolio compared to\u00a0active investing\u00a0which\u00a0relies on a portfolio manager’s judgement to manage the\u00a0portfolio. \u00a0There are many ways to implement an index approach. \u00a0Most index funds follow a commercially published index like the S&P\/TSX 60 in Canada or the S&P500 in the US. \u00a0The […]<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1,16,10,7,12,15],"tags":[],"class_list":["post-480","post","type-post","status-publish","format-standard","hentry","category-all-posts","category-asset-allocation","category-evidence-based-approach","category-graham-bodel-posts","category-passive-vs-active-investing","category-risk-and-return"],"_links":{"self":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/480","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/comments?post=480"}],"version-history":[{"count":3,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/480\/revisions"}],"predecessor-version":[{"id":486,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/480\/revisions\/486"}],"wp:attachment":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/media?parent=480"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/categories?post=480"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/tags?post=480"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}