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JAN. 28, 2022

Where is the Value?

Since November 2020, the Value style of investing has made a comeback. After more than a decade of outperformance of high-quality growth stocks, value stocks bounced back at the end of 2020 and have been maintaining a decent outperformance until now.

Also, in the more recent selloff since the beginning of the year, the S&P 500 Value Index is outperforming the S&P 500 Growth Index by almost 10% through yesterday.
The reasons for this are various. Historically, traditional value sectors such as Energy and Financials tend to perform the best in an increasing interest rates environment. This is proving true also year-to-date: the S&P 500 Energy Index is up 17% YTD, and the S&P 500 Financials is down around 3%, versus the general index down 9.5%. Higher inflation is also a positive for Value stocks. Higher interest rates also translate into a higher discount rate in valuations, and therefore they negatively affect growth stocks.

Managing an active portfolio of Value stocks over the last decade has been extremely challenging: the returns have lagged, with higher volatility, and these funds have underperformed not only their Growth counterparties but also the broader market. Investors' disappointment with the poor performance of active value managers had two main effects: many Value funds have shut down or have lost a considerable amount of AUM.

Among those who have survived, a style drift has happened. A style drift is the divergence of a fund from its investment style. During the last few weeks, we have seen many funds marketed as Value show a significant underperformance versus the Value benchmark and an overall return in line with those of Growth portfolios. When we get into the details of these so-called Value funds, we find portfolio characteristics that we can only define as growth: funds with Technology holdings at around 25% and funds with an average P/E ratio higher than the index.

This is why it is essential to have a complete understanding of a manager's style, to understand the rationale behind their style and the hidden factor bias a manager might have.

We thank you for the continued support.

The FAM team