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The Ford Model T, back when value stocks were this unpopular. (Photo by Three Lions/Getty Images)
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If you have any old-fashioned “value” or “equity income” funds in your 401(k), IRA or other retirement accounts, right about now you may be asking yourself, or your financial adviser, some very awkward questions.
Such as: Why am I holding these turkeys?
And: Is it too late to sell?
Strategists divided the stock market cleanly into “value” and “growth” halves. The former consist of the stocks that are cheapest in relation to net assets, current cash flow, and so on. These tend to be older, duller, and less exciting companies. The other half, “growth,” tends to consist of the glamorous companies you read about in the news doing new things – like the so-called FAANGs, meaning Facebook FB, -0.75%, Amazon AMZN, -0.57%, Apple AAPL, +0.00%, Netflix NFLX, -0.06% and Google/Alphabet GOOG, -0.93%, and companies like Zoom ZM, +1.96% and Tesla TSLA, -0.53%.
Morningstar MORN, +0.11%, the fund-research company, says the average U.S. large company “value” mutual fund has lost 8% so far this year, even including reinvested dividends. The average growth fund? It’s up a stunning 27%. And this gap has been going on for years: “Growth” funds have beaten “Value” funds since as far back as 2007, market data show.
Andrew Lapthorne, chief number cruncher at investment bank SG Securities, says that “Value” is now doing worse, in relative terms, than at any point in a century of data. “Value performance is bad, the worst it has been in 100 years,” he writes. No, really. Forget the dot-com period. We’re probably back to the era of World War I, or maybe earlier, to find as big a gap in the performance of the stocks.
Yikes.
Yet, Lapthorne adds, the underlying business performances of these “value” companies have been no worse than usual. “[T]he biggest negative impact is through an extreme de -rating of Value stocks at a time when their economic performance was broadly in line with history and the market overall,” he writes.
In other words, it’s not the businesses: It’s the stocks.
This has led to a lot of head-scratching and pencil-sucking among the scribblers of Wall Street, to explain What It All Means. Some say it’s to do with the monopoly profits of the handful of companies that now rule the world — like the FAANG “growth” stocks — which have left “value” as passé. Some say it’s to do with the yield curve, and falling interest rates, which makes these growth stocks even more attractive as investments. Some say it’s because the traditional measures of “value,” such as comparing stock prices to net assets, no longer apply.
They may all have a point. But nobody really knows. If they did, they’d all be rich and they wouldn’t have to work for a living.
You could also argue that the stock market is a giant mechanism of crowd psychology, and that these things go in and out of fashion.
We’ve seen this movie before. Every time I read another market commentator telling me “value” is totally finished, and “growth” is the place to be, I feel like I’m back in the dot-com mania of the late 1990s, when another group of market commentators were telling us exactly the same thing.
Then, almost before you could say “Pets.com,” the growth stock mania suddenly collapsed and everyone discovered that it made sense to buy stocks in boring but profitable companies when they were really cheap. Who knew?
MSCI, MSCI, +0.45% the market data company, has been dividing the U.S. stock market into “Value” and “Growth” and tracking the performance data since 1970. I took a look at their numbers to see what they said.
First, over the long term the two have performed about the same. The entire outperformance by growth is accounted for by the last seven months. Yes, really. If you’d put $1,000 each into these MSCI US (large cap) Growth and Value indexes in 1974, and just left it there, reinvesting the dividends, through February of this year “value” had actually done slightly better than “growth.” (OK, so I’m ignoring taxes and trading costs). Only since March has growth moved ahead.
Second, when you look at performance month by month the even split is staggering. Value has beaten growth in 275 months since 1974. Growth has beaten value in…274. No, really. What are the chances of that being random?
And, third, these trends go in long waves. Growth was the place to be in the late 1990s. Value in the early 2000s. Growth was hot in the early 1970s. It did disastrously for the next decade. And so on. These trends can go on for a decade or more — before doing a 180. And, as we all know, dumb money chases past winners, so once a particular set of stocks has done better for a period of time everyone wants them, no matter what the price.
Right now the gap in dividend yields between the two is remarkable. The Vanguard Value ETF VTV, +0.05% yields 2.8%, according to FactSet. That’s more than four times as much as the yield on the Vanguard Growth ETF VUG, +0.06%, which is just 0.7%. The gap, according to FactSet, is even bigger than it was at the peak of the dot-com mania in early 2000.
When will “value” rise again? Will it ever? Devotees have been calling for its resurrection for years. They have, so far, been painfully and expensively wrong, or early. Nobody knows.
On the other hand, those who just own a traditional S&P 500 index SPX, -0.05% fund (such as the SPDR S&P 500 ETF trust SPY, +0.01% ) are, perhaps unwittingly, taking a big bet on the biggest “growth” companies: About 25% of their money is going just into the six most valuable growth companies, fund data reveal.
Lapthorne points out that even if you fear value stocks and value funds may keep doing badly, you should probably consider hanging on to some of them in your retirement account for a very simple reason: They’re a diversifier. They may go up when the rest of your portfolio goes down. They are, he adds, very likely to do relatively better if interest rates rise.
Meanwhile, six years ago, researchers found that over the long term, going back at least to the mid-1960s, your best strategy was simply to own a range of stocks and, critically, to own them equally — in other words, to invest the same amount in each one, regardless of how big or small it is. (By contrast, if you buy an S&P 500 index fund about 7% of your money goes into one stock, Apple, alone because it’s so big.)
For those who want to take this bet there are two low-cost exchange-traded funds that will do this for you: The Invesco S&P 500 Equal Weight ETF RSP, +0.29%, which charges 0.2% a year in fees, and the iShares MSCI USA Equal Weight ETF EUSA, +0.44%, which charges just 0.15%.
