The current market cycle is testing the patience of value investors, according to an article in Barron’s.
“Although value managers haven’t lost money, they have watched growth managers steadily pedal away,” the article reports, citing Morningstar data showing that over the past decade large-cap growth funds have returned an average of 15.6% annually, versus 13.2% for large-cap value.
Historically, the article notes, value investing has lagged growth for long periods but eventually outperformed. This market cycle, however, shows a persistent gap, leaving some wondering whether value will ever catch up. The wide spread in valuations between the cheapest and most expensive stocks, the article says, has “led investors to ask whether value stocks are the greatest deal of the decade or on a steady slide to obsolescence.”
Before 2010, the article notes, periods of wide chasms between valuations eventually leveled, but the same doesn’t seem to be happening now. “If anything,” the article says, “growth has continued to get an edge.”
The article cites comments from Nomura quantitative strategist Joseph Mezrich: “What changed in 2010 was quantitative easing and its impact on the yield curve”—which, in flattening, gives growth stocks a bigger advantage over value. Mezrich adds, “Value will come back, but not until we see a persistent steepening of the yield curve.”
Among the many theories for why value is lagging, the article notes the “easiest one to grasp” is that at this late stage in the cycle, it’s tough to find bargains. “If something is cheap in the later stages of a bull market, it’s usually for good reason.”