Reporting on a Goldman Sachs study published a few months ago, a recent article from the Wharton School addresses the underperformance of value compared to growth strategies.
The Sachs report, it says, claims that “value investors are seeing the longest dry spell since the Great Depression, and future returns will likely be lower than the historical average.” But the firm also acknowledges that assessing whether value strategies are in trouble depends on how one views value. Specifically, the report says value strategies that choose stocks based on the ratio of enterprise value to EBITDA have performed better than those (like the Fama-French model) that focus on the price-book ratio.
According to Christoper Geczy, academic director of the Wharton Wealth Management Initiative, if you control for sector—tech, in particular, which has an “outsized” effect on performance–the margin between growth and value is “much, much lower.”
The article cites comments of Jocelin Reed of value-oriented money management firm AJO, who argues that sector allocation in the Russell value and growth indexes drove the underperformance of value—and that growth usually dominates when the tech sector outperforms financials and consumer stocks surpass energy stocks. “As such,” she wrote in a memo last month, “the global financial crisis and oil shocks define this period far more than a breakdown in the fundamentals of value investing.”
Wharton finance professor Donald Keim weighs in: “It’s hard to predict when we will observe the turning point from positive to negative, or vice versa,” adding, “Do I think the value premium is dead? No. I’m pretty confident that at some point in the future, the value premium will again be positive.”