Value investing strategies have underperformed growth stocks for 13 straight years, but there have been recent signs that changes might be afoot. Bespoke Investment Group noted Monday that the technology stocks that dominate the growth stock indexes are underperforming the S&P 500′s 9.3-per-cent return since June 30, while value-oriented sectors ,like materials and industrials, have jumped well over 10 per cent.
Previous periods of value stock outperformance in recent years have been short-lived, and Kai Wu, founder of New York-based investment firm Sparkline Capital, believes this will continue to be the case.
Mr. Wu argues that value investors will never overcome their inherent short position in the disruptive, innovative power of technology stocks. He notes that the Russell 1000 Value Index has a 9.7-per-cent weighting in information technology, while the growth index is 44.4-per-cent technology.
The author writes, “Value investors are making an epic 34.7 per cent short bet against the technology sector… Value has a meagre 1.4 per cent position in FAANG+M [Facebook Inc., Apple Inc., Amazon.com Inc., Netflix Inc., Alphabet Inc. and Microsoft Co.] compared to Growth’s 39.4 per cent. Not only are value investors short tech, but they are short Big Tech. And in a big way.”
There are a few reasons why value investors would object to this framing of the issue. For one, there is a difference between being underweight technology and actively short the sector.
More importantly, the key short position for value investors is less technology than human psychology. The value strategy’s focus on hard numbers – valuations primarily – allows them to sidestep the hype, buzzwords and excessive optimism that can drive growth stocks into prohibitively expensive and financially dangerous territory. More attractively valued stocks have also historically protected invested capital much better than growth stocks during downturns.
Mr. Wu is right to call out the extended failure of value investing strategies. He does, however, grant that the trend has left value stocks extraordinarily attractive (by their own criteria), “Value companies are trading at their deepest discount since the peak of the tech bubble. The relative price-to-book ratio of Fama-French value is now two standard deviations cheap compared to its historical average.”
Separately, BofA Securities (formerly Merrill Lynch) quantitative strategist Savita Subramanian has been definitively recommending value stocks to clients. Ms. Subramanian noted that value stocks had underperformed growth stocks by 31 per cent as of the end of July – the widest margin since 1979 – and were due for a bounceback. She added, “we prefer value – which is underowned, inexpensive, and poised to outperform in the coming months.”
I’m not about to declare a permanent end to the rally in technology stocks at this time. Still, value stocks are exceedingly attractive in the current market for a portion of investor portfolios, providing not only potential outperformance, but also diversification and downside protection.
-- Scott Barlow, Globe and Mail market strategist
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Ask Globe Investor
Question: I had a $30,000 GIC mature in my TFSA account, for which I earned a princely $666 in interest! I looked at putting the money into another GIC, but the return would be even less. I don't need the money for at least 10 years.
Can you suggest somewhere safe to put it in the meantime? Most of my investments are in mutual funds and stocks, so I’d like to have a little cushion in something that won’t lose money. Thank you for your time.
Answer: An investment that won’t lose money over 10 years? If you take inflation risk into account, even GICs and high-interest savings accounts could lose purchasing power over that time. A 10-year Government of Canada bond is only yielding about 0.5 per cent, so you probably don’t want to go that route either.
With a 10-year time horizon, I suggest you consider taking on a small amount of risk with your money. If you don’t own them already, some good utility stocks or a fund that invests in them would be worth considering. These would include companies like Fortis Inc. (FTS-T), Canadian Utilities Ltd. (CU-T) and Emera Inc. (EMA-T). Because most of their income is regulated, the downside risk is minimal, and the dividends appear to be secure.
--Gordon Pape
What’s up in the days ahead
Power Corp. shares are trading at a curiously large discount to the underlying value of the company’s international financial assets. David Berman will probe further.
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Compiled by Globe Investor Staff