Gardeners are busy planting seeds in the hopes that, with a little luck and more than a little effort, they'll enjoy a bountiful harvest this fall.
But, when it comes to the markets, value stocks are still locked in the deep freeze. The chill can be seen in the recent record of two exchange traded funds.
The popular SPDR S&P 500 ETF (SPY), which tracks the S&P 500, chalked up average annual gains of 7 per cent over the past decade. Its value counterpart, the SPDR S&P 500 Value ETF (SPYV), gained only 5.7 per cent annually over the same period, according to Morningstar.ca. The value ETF trailed the market by 1.3 percentage points annually.
To gain some historical perspective on the chilly period, I turned to data compiled by Dartmouth College professor Kenneth French. He tracks the performance of two value portfolios, among others. One is composed of the 10 per cent of U.S. stocks with the lowest price-to-earnings (P/E) ratios and the other follows U.S. stocks with the lowest price-to-book value (P/B) ratios. Each portfolio is updated annually to ensure that it stays with the right low-ratio stocks over time. The portfolios are also weighted by market capitalization, which means they favour large stocks over small stocks.
Prof. French's data span the period from July, 1951 through to the end of 2015 during which time the S&P 500 gained an average of 10.9 per cent annually. That's pretty good but the value portfolios fared even better. The low-P/E group gained 16.0 per cent annually and the low-P/B portfolio climbed 14.5 per cent annually.
The strong multi-decade returns for the value portfolios are encouraging. But the historical record also contains a few surprisingly long periods when they fared poorly. The same goes for the market more generally.
Looking at rolling 10-year time frames, the S&P 500 gained just 0.5 per cent annually during the decade that ended in the fall of 1974. It fared even worse during the decade that ended in early 2009 when it lost 3.4 per cent annually. (These figures are based on monthly data and include reinvested dividends.)
The value portfolios held up better than the S&P 500 during these periods. The low-P/E portfolio was profitable in all 10-year spans from mid-1951 through 2015.
It gained 3.8 per cent during its weakest decade, which ended in late 1974. The low-P/B portfolio didn't do as well. It fell 1.1 per cent annually during its worst decade, which ended in early 2009.
The accompanying chart shows the annualized return difference between each value portfolio and the S&P 500 over rolling 10-year periods.
As you can see, value fared well in general with both the low-P/E and low-P/B portfolios beating the S&P 500 in roughly 90 per cent of the rolling 10-year periods. However, both value portfolios also underperformed about 10 per cent of the time.
Value investors famously struggled in the 1990s and many value fund managers were given the heave-ho in the later years. Those who held on saw their clients jump ship and crowd into the hot high-tech stocks of the day. While the tide eventually turned, a generation of value managers had already lost their jobs.
Unfortunately, value investors appear to be stuck in another poor period. Once again, many value funds have seen their assets dwindle over the last few years. A few value managers have given up on the sort of low-P/B deep-value stocks that Benjamin Graham would have loved and turned instead to higher quality names of the sort favoured by Warren Buffett.
Such observations fit into an all too familiar pattern. But spring will come again for value investors and it might be time to plant a few seedlings in the market before the growing season begins in earnest.
Norman Rothery is the value investor for Strategy Lab.