The value investing is not dead yet although it has underperformed growth in recent years, a picture which is distorted by the rise of a very narrow set of technology stocks.
According to Realindex’ analysis, the rise of a small handful of growth stocks caused a distortion and obscured the true performance of value investing in global markets, in an environment where a handful of outlier stocks inflated the index, fuelled by investor sentiment and easy monetary policy.
“There is no magic factor that consistently delivers alpha month in, month out. Value, like other styles, is known to have long periods of underperformance, followed by outperformance. Over the long run, value investing works, and a plethora of empirical evidence supports the value premium,” Realindex quantitative analyst Wang Chun Wei said.
However, Realindex’ research titled ‘Value is dead, long live value’, pointed out points that current circumstances led some to conclude that value was synonymous with poor quality and growth stocks with high quality.
“There is an assumption that in a continued low growth world, there is little hope for poor quality names to outperform, and thus value is as good as dead. However, our empirical analysis shows it’s not this simple,” Wei said.
“When we plot the relationship between quality and value for all MSCI World stocks, we see that it is possible to have value stocks with earnings certainty and low leverage, and vice versa, for growth names.”
He also said that when analysing price to book ratios, it became apparent that expansion of the most expensive stocks could be attributable to growth stocks becoming “pricier” as opposed to value stocks becoming “cheaper” and this effect was compounded by the stellar growth of a handful of names which distort the market, according to the paper.
““In essence, the recent outperformance of growth has been driven by a very narrow set of technology stocks, and we think this is unsustainable.
“Isolating five stocks, including Tesla, Amazon and Apple, our paper shows that the value underperformance, relative to the market capitalization benchmark, largely disappears once we exclude these names. To us, the outperformance of growth looks quite unstable. If we take out a handful of US tech darlings, value has actually kept pace with the broad market.”
