Value investing was supposed to be on the mat, waiting out its last few moments before it surrendered for good to growth stocks. But a curious thing happened in 2016; it got back up and rallied, and it looks as if it is prepared to continue the fight.
Value stocks didn’t just beat growth stocks last year. They dominated in every conceivable category. Here’s a recap for those who haven’t yet seen the score card:
- MSCI USA Value Index beat MSCI USA Growth Index by 10.4 percent last year, including dividends.
- MSCI USA Small Cap Value Index beat MSCI USA Small Cap Growth Index by 11.8 percent.
- MSCI EAFE Value Index beat MSCI EAFE Growth Index by 8.3 percent.
- MSCI EAFE Small Cap Value Index beat MSCI EAFE Small Cap Growth Index by 7.6 percent.
- MSCI Emerging Markets Value Index beat MSCI Emerging Markets Growth Index by 7.6 percent.
- MSCI Emerging Markets Small Cap Value Index beat MSCI Emerging Markets Small Cap Growth Index by 14.1 percent.
That’s what dominance looks like in investing.
Value’s revival couldn’t come soon enough. Growth stocks around the world have outpaced value stocks for much of the post-financial crisis period (the one exception is small-cap U.S. stocks). Many investors have been asking whether value investing is done.
The argument against value goes something like this: Everyone knows that value stocks have outperformed growth stocks historically. The explosion of smart beta funds makes value investing cheaper and more widely available than ever before. Thus, investors will flock to value stocks and thereby squeeze away the value premium.
There are two big holes in this argument, however. The first is that value investing has been well known and accessible to investors for decades. The approach was painstakingly described by Ben Graham and David Dodd in their 1934 value investing classic "Security Analysis" and was later popularized by Warren Buffett and others. Academic finance journals have documented the value premium since the 1970s.
There’s also never been a shortage of value funds. Even low-cost value index funds have been around for decades. And yet, despite value investing’s long-standing fame and widespread availability, value stocks have outpaced growth stocks in numerous periods.
The second problem is that value stocks aren’t likely to appeal to every investor. They are more volatile than growth stocks. It stands to reason that investors who want a less bumpy ride will naturally prefer growth stocks.
The question now is whether 2016 is the start of value’s comeback or merely an isolated round of good fortune. If you believe -- as I do -- that investing styles like value and growth are cyclical, then there’s good reason to believe that value is just getting started.
Consider large-cap U.S. stocks, for example. The MSCI USA Value Index has beaten the Growth Index by an average of 0.2 percent annually over rolling five-year periods since 1979 -- the longest period for which data is available. But the Growth Index has beaten the Value index by 0.3 percent annually over the last five years through 2016. Those numbers imply that value has more work to do to deliver the kind of premium that value investors are used to.
Value stocks in overseas markets have even more ground to cover. The MSCI EAFE Value Index has beaten the Growth Index by an average of 3.1 percent annually over rolling five-year periods since 1979, but the Growth Index has beaten the Value index by 0.2 percent annually over the last five years.
Similarly, the MSCI Emerging Markets Value Index has beaten the Growth Index by an average of 2.1 percent annually over rolling five-year periods since 2001, but the Growth Index has beaten the Value Index by 2.8 percent annually over the last five years.
It’s still too early to call it a comeback. But after value’s epic performance in 2016, it’s time to acknowledge that value investing is alive and punching back.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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Nir Kaissar in Washington at email@example.com
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