Snapshot - Economics
The chart that tells the story of value investing’s potential
Value stocks are currently the most out of favour in the history of financial records. Is now the time for value to make its comeback?
29 March 2019
Value stocks are on their longest losing streak versus growth stocks since records began, according to data stretching back to 1936.
Value investing is the art of buying stocks which trade at a significant discount to their intrinsic value. Basically, buying companies which appear undervalued by investors for no justifiable reason.
Growth investors pay less attention to a stock’s price. Even if a company looks expensive they may believe its above average future growth justifies the expensive price tag.
Value’s longest losing streak in history
There have been three periods of dramatic underperformance by value relative to growth since records began: the tail-end of the Great Depression in the late 1930s, the build up to the bursting of the dotcom bubble in the late 1990s and now.
As the chart below shows, value’s underperformance during the late 1930s and 1990s was sharp but also short, lasting around four years and two years respectively. In comparison the current underperformance which began in 2009 is now nearly a decade old.
The good news for value investors is that in the past, value’s bouncebacks were even more dramatic than the underperformance.
Analysis by academics Eugene Fama and Kenneth French has shown that in the five years following its underperformance trough in 1940 value outperformed growth by 138%. Similarly, when value’s two year underperformance troughed in 1999 it outperformed growth by 107%. The question for value investors now is could history repeat itself?
Of course, past performance is not a guide to future returns.
Why now for value?
Nick Kirrage, an equity value fund manager at Schroders, explains why now might be a good time to consider value stocks.
“We know we should buy low and sell high. We are looking for investment strategies that are enduring and we want to buy them when they look cheap and attractive.
“Value has been through one of its worst periods in history. Performance has been weak but we continue to have the conviction that value is an enduring investment style.
“When we look across investments in the market today we see a huge bias in investors’ portfolios towards growth-type investments. That presents an opportunity, to diversify and buy into a strategy that has a great long-term success record.
“So why now? Because, we believe, with value stocks at such attractive levels the opportunity has never been greater.”
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