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Value vs growth

I was recently asked, “How can you be confident that value investing will work again, when the historical results look so skewed to growth?” It’s a fair question. Looking at the Russell 1000 Growth and Value indices, growth is ahead on a one-, three- five-, 10-, and 30-year basis, and indeed since 1978, when data is first available. Among the most striking results are the one-year returns (37.5% for growth and -5.0% for value) and the 10-year annualized returns (17.3% for growth and 9.9% for value).1

However, these numbers mask how quickly the picture has shifted. As recently as February, value was beating growth since inception. And before the global financial crisis, value was ahead by more than 2% annually over almost three decades since 1978. Perhaps more importantly, there has been a strong cyclicality to the performance of growth and value that makes some “extreme” periods seem a bit more ordinary.

Haven’t we been here before?

In 1999 and 2000, growth was beating value since inception — and on a trailing one-, three-, five-, 10- and 20-year basis. Then, too, investors were asking, “Is value dead?” But value was…

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Adam Berger
Adam Berger
CFA
Multi-Asset Strategist
Boston
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In my conversations with clients at the end of 2020, many of the same questions kept coming up. Here are five that topped the list, along with my thoughts in response.

#1: Given last year’s robust market gains and the current state of the economy, how optimistic are you about 2021?

There are always risks for investors to navigate. Notably, this latest surge in COVID-19 cases, hospitalizations, and deaths marks a tragic phase in the ongoing global health crisis. However, as we learned in 2020, markets are forward looking. I believe the recently approved COVID vaccines, gradually reopening economies, and easy fiscal and monetary policy should provide a supportive backdrop for potentially solid gains from risk assets in 2021. So optimism seems in order, but given that is the consensus view, I am only moderately bullish on global equities as of this writing.

FIGURE 1

There is pent-up demand to “get back to normal”

#2: What’s your take on what a Biden presidency might look like?

Many investors are concerned about a progressive Biden agenda. However, the president-elect’s razor-thin majorities in the House and Senate and a low likelihood of removing the Senate filibuster have dimmed chances for proposals like the “Green New Deal” and “Medicare for All.” That said…

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Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston

In my conversations with clients at the end of 2020, many of the same questions kept coming up. Here are five that topped the list, along with my thoughts in response.

#1: Given last year’s robust market gains and the current state of the economy, how optimistic are you about 2021?

There are always risks for investors to navigate. Notably, this latest surge in COVID-19 cases, hospitalizations, and deaths marks a tragic phase in the ongoing global health crisis. However, as we learned in 2020, markets are forward looking. I believe the recently approved COVID vaccines, gradually reopening economies, and easy fiscal and monetary policy should provide a supportive backdrop for potentially solid gains from risk assets in 2021. So optimism seems in order, but given that is the consensus view, I am only moderately bullish on global equities as of this writing.

Figure 1

US Dallas Fed Mobility Engagement Index ("Social Distancing" Index)

#2: What’s your take on what a Biden presidency might look like?

Many investors are concerned about a progressive Biden agenda. However, the president-elect’s razor-thin majorities in the House and Senate and a low likelihood of removing the Senate filibuster have dimmed chances for proposals like the “Green New Deal” and “Medicare for All.” That said…

MACRO
MARKETS

ARCHIVED

Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston

In my conversations with clients at the end of 2020, many of the same questions kept coming up. Here are five that topped the list, along with my thoughts in response.

#1: Given last year’s robust market gains and the current state of the economy, how optimistic are you about 2021?

There are always risks for investors to navigate. Notably, this latest surge in COVID-19 cases, hospitalizations, and deaths marks a tragic phase in the ongoing global health crisis. However, as we learned in 2020, markets are forward looking. I believe the recently approved COVID vaccines, gradually reopening economies, and easy fiscal and monetary policy should provide a supportive backdrop for potentially solid gains from risk assets in 2021. So optimism seems in order, but given that is the consensus view, I am only moderately bullish on global equities as of this writing.

Figure 1

There is pent-up demand to “get back to normal”

#2: What’s your take on what a Biden presidency might look like?

Many investors are concerned about a progressive Biden agenda. However, the president-elect’s razor-thin majorities in the House and Senate and a low likelihood of removing the Senate filibuster have dimmed chances for proposals like the “Green New Deal” and “Medicare for All.” That said…

MACRO
MARKETS

ARCHIVED

Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston

Remarkable, painful, unsettling, hopeful… 2020 brought a roller-coaster ride of emotions, not to mention its share of economic and market volatility. So, with the US elections pretty much behind us, further US fiscal stimulus on hold (for now), and COVID cases spiking in the US and Europe (but with progress toward a vaccine), what’s our investment thesis for 2021?

Over our 12-month horizon, the promise of more good news on the vaccine front, along with gradually reopening economies and strong government policy support, make us more confident that we’ll begin to see the global economy recover from still-depressed levels. We believe the improving economic backdrop and the prospect of a safe, effective vaccine should be catalysts for a turning point in the market narrative — a broad, durable rotation from growth assets into their value counterparts. This could well be an enduring theme going forward.

Global equities: Leaning toward value

We expect a range of value-type equity exposures to outperform in 2021, including overseas developed markets (Europe and Japan versus the US), emerging markets, smaller-cap stocks, and cyclical sectors (such as financials) versus growth sectors. In addition to financials, sectors we find attractive include…

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Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston
Daniel Cook headshot
Daniel Cook
CFA
Investment Strategy Analyst

The short answer is that they up and left, at least judging by the percentage of value managers (80%) that were recently underweight value stocks (Figure 1). Some observers may offer reasonable arguments for why such positioning seems justified in the current environment, but the fact is that value equity managers have traditionally tended to lean into relative valuation extremes like today’s. Instead, most are leaning away.

Figure 1

Opportunity in value stocks? 80% of value managers were recently underweight the group

Déjà vu all over again?

This calls to mind a 20-year-old quote from retired Wellington Portfolio Manager Ed Owens that is relevant again today. In January 2000, Ed opined that “value is particularly attractive now, because it has…

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Andrew Corry
Andrew Corry
CFA
Equity Portfolio Manager
Boston

Calls for the impending collapse of growth equities, particularly tech stocks, are getting louder as the market marches higher and the share of the biggest tech players grows larger. Recent investor concerns have focused on frenzied retail trading, high trading volume generally, and the dramatic rise in valuations since late March.

I agree that valuations among the tech leaders are at expensive levels relative to their history. I also concede that the growth segment of the market has taken on some speculative characteristics of late. However, what to do about it is another matter entirely. Go into cash at 0%? Rotate into bonds yielding 60 basis points? Move into more defensive equity sectors? Shift from growth- to value-style investing?

My answer is to not wholesale exit the market, but rather to reassess…

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Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston

The US equity market (as measured by the S&P 500 Index) has staged a remarkable rebound over the past few months, gaining 40% from its COVID-19 low on March 23. Notably, the shape of the rally has shifted during that time. In mid-May, market leadership rotated from growth to value stocks, raising a provocative question: How sustainable is value’s outperformance going forward?

The case for value now

Longer term, I suspect the global economy is not set up for strong growth, given the accumulation of massive government debt, the demographics of an aging population, and increased costs associated with deglobalization. Therefore, I still prefer growth stocks overall. In the near term, however, here are four points to consider in favor of value:

  1. History — Value has typically outperformed growth coming right out of recessions.
  2. Fundamentals — The economy is in the early stages of recovery from the COVID-19 shock.
  3. Valuations — Value-oriented sectors are currently trading at potentially attractive valuations.
  4. Technicals — Value is “under-owned,” due in part to its underperformance over the past decade.

Understandably, many investors are gun shy about jumping into value when its performance has been so disappointing for so long. Ironically, this may be precisely why…

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Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston
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