International Large-Cap Value Stocks: Is Value In The Early Stages Of Recovery?
Brandes Investment Partners
The current research of The Brandes Institute shows that international large-cap value stocks recently have experienced a series of rolling five-year periods in which they have either lagged or performed broadly in line with their glamour counterparts. This is their longest stretch of weak relative performance over the 34 years for which we have studied returns. In this article, we explore the track record of value versus glamour in the international large-cap space, the reasons behind value’s near-term underperformance, and evidence that a recovery in value already may have begun.
Main points of this article:
- Over the long term, large-cap value stocks in non-U.S. markets have outperformed large-cap glamour stocks.
- However, over recent rolling five-year periods, international large-cap value stocks have stumbled versus their glamour peers, driven by the weak performance of European financials.
- There are signs that value’s slump may be waning, and that non-U.S. large-cap value stocks may be entering a period of relative strength.
International Large-Cap Value Stocks: Is Value In The Early Stages Of Recovery? - Introduction
In his 1949 book The Intelligent Investor, Benjamin Graham observed that the market tends to overvalue stocks of companies which are “glamorous” for some reason, such as having high growth rates, and undervalue stocks of companies facing temporary challenges. Since then, there have been numerous studies of the performance of value versus glamour stocks, including the seminal 1994 study “Contrarian Investment, Extrapolation and Risk” by Josef Lakonishok, Andrei Shleifer and Robert Vishny (LSV). Given the compelling results of LSV’s work, the Brandes Institute has been updating and expanding our analysis for more than a decade.
Over the past 34 years, international large-cap value stocks1 have generated higher returns than international large-cap glamour stocks across different valuation metrics.
In the “Value vs. Glamour: A Long-Term Worldwide Perspective” study, the Brandes Institute measured the performance of value and glamour stocks across regions, market capitalizations and valuation metrics. Our most recent study covered the period from June 1980 through June 2014.
Exhibit 1 shows that, over this entire period, large-cap value stocks in 22 developed countries outside the United States outperformed large-cap glamour stocks. Value’s outperformance, or the value premium, was evident regardless of the valuation metric used to classify securities—whether price-to-book (P/B), price-to-earnings (P/E) or price-to-cash flow (P/CF) ratios.
While outperforming over the long term, international large-cap value stocks either trailed international large-cap glamour stocks or produced similar returns over recent rolling five-year periods.
In Exhibit 2, we subtracted the five-year returns of decile 1—the extreme glamour decile—from the returns of decile 10, the extreme value decile. Value dominated in all but one five-year period from 1985 through 2009 but then lagged glamour by approximately 2.0% (annualized) in each of the rolling five-year periods ending in June 2010, 2011 and 2012. Value’s performance versus glamour was essentially flat in the two subsequent 5-year periods ending in June 2013 and 2014.
Results were similar when looking beyond the extreme glamour and value deciles. In the vast majority of rolling five-year periods from 1985 through 2009, deciles 8-10—the top value deciles—generated higher returns than deciles 1-3, the top glamour deciles. The top glamour deciles then trumped the top value deciles in each of the five-year periods ending in June 2010, 2011 and 2012 by anywhere from 2.0% to 2.7% (annualized). For the 5-year periods ending in June 2013 and 2014, the top three glamour and value deciles performed broadly in line with one another.
Short-Term, Concentrated Underperformance
The underperformance of non-U.S. large-cap value stocks was concentrated in three 12-month periods.
The recent rolling five-year periods in which decile 10 value stocks either lagged or performed in line with decile 1 glamour stocks encompassed the nine 12-month periods shown in Exhibit 3. Significant underperformance in the 12-month periods ending in June 2008, 2011 and 2012 drove value’s weak rolling five-year results.
European financials, which are heavily represented in the value deciles, played a central role in the underperformance of value versus glamour during these three 12-month periods.
Within the international large-cap segment, the performance of European financial stocks goes a long way in explaining why value trailed glamour in each of the 12-month periods ending in June 2008, 2011 and 2012. As shown in Exhibit 4, European financials represented a substantial percentage of the top value deciles and had an even greater impact on returns than their weight would imply. So as went European financials, so went the value deciles, and European financials—especially banks—performed very poorly on a relative basis; see Exhibit 5.
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