Value lives.
Dutch quantitative investment specialist, Robeco, says the stock market factor remains in good health, refuting long-reported rumuors of its death, or comatose state.
According to the new Robeco analysis, value – or the ‘enhanced value’ approach championed by the manager – has “delivered attractive long-term returns”.
“Despite its solid long-term track record, the strategy also suffered during the ‘quant winter’ from 2018 to 2020, after which many called value investing dead,” the study says.
But while value thawed somewhat from 2021 onwards, the factor has still not recovered its mojo relative to growth.
“… one clearly sees that the spread in valuation between value and growth stocks substantially widened between 2018 and 2021 but has not fully normalized since then,” Robeco says. “This demonstrates that a substantial part of the outperformance of growth stocks during this period was not driven by increasing earnings but by multiple expansions.”
With value now trading at close to its cheapest historical levels and growth stocks defying gravity at high multiples, something has to give, the report says.
“… the spread in both growth expectations and realized growth rapidly converges in the years after portfolio formation, with value stocks experiencing improvements in growth realizations and expectations.
“In contrast, their expensive peers encounter deteriorating growth realizations and expectations. Therefore, investors appear to be overpaying for the expected growth differences at portfolio formation, as analysts and other market participants extrapolate historical growth too far into the future. In other words, realized growth does not live up to expectations.”
The Robeco study says the relative underperformance of value last year reflected the dominance of the ‘magnificent seven’ US large cap stocks, equating to a “size effect in disguise” rather than a growth factor victory per se.
And the report also downplays the reputed link between interest rates and long-term value performance, noting only a brief correlation over 2018 to 2020.
“The value-rates narrative therefore seems more like a short story than an ongoing saga.”
If the Robeco narrative plays out, value investors might finally breathe a sigh of relief.
The Rotterdam-headquartered firm manages about €180 billion of institutional money, including a global equities multi-factor advisory mandate for the NZ Superannuation Fund.