Value investing is dead according to a new report from Goldman Sachs’ Portfolio Strategy Research Team headed by Ben Snider.
In a research report issued earlier this week, Snider and team claim that over the past decade the value factor has suffered a cumulative 15% loss, declining in six of the last ten years. This dire performance has certainly proved to be a large black mark on the factor’s long term performance. From 1940 to 2007 the value factor pioneered by Eugene Fama and Kenneth French posted an average annual long/short return of 5%, making it the best performing investment strategy in history.
However, as noted above over the past decade the strategy has lost its shine experiencing an average annual loss of 2%. Value did try and rise from the dead during 2016 with the Russell 2000 Value index adding 31% although 2017 has seen a reversal with the index falling 10% year-to-date.
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GS: Value Investing Is Dead, Or Is It?
Goldman’s report, titled The Death Of Value, notes that this deterioration in value’s performance has occurred at the same time as an explosion in assets devoted to passive investing and quant strategies:
“The equity assets of funds with quantitative investment approaches currently stand above $1 trillion. Roughly the equivalent amount has flowed from US equity mutual funds to ETFs during the past decade. The AUM of passive, factor-based “smart beta” ETFs and ETNs has quadrupled in the last five years and approached $600 billion in early 2017.”
The big question now is, whether or not this is the death of value once and for all or if it’s just a blip in the fact’s performance?
Snider and team believe this is just a blip in performance. The report notes that value has historically posted “its strongest returns during periods of strong economic growth early in the economic cycle” and the factor “typically wanes late in the cycle as investors search for secular growth opportunities when economic growth slows.” The lack of economic growth and concerns about the possibility of “secular stagnation” in recent years has “compounded the investor hunt for growth, ” and while these concerns are now lifting, the maturity “of the current economic cycle suggests value returns will remain subdued in the near term.”
Monetary policy has also been a headwind to value. Wide multiple dispersion means larger potential gains to investors buying the lowest valuation stocks and selling the most expensive stocks. Ultra-easy monetary policy has led to extremely tight multiple dispersion in recent years, posing a “strong headwind to value factor returns” the report notes. As the Fed begins to normalize policy, dispersion should increase benefiting value.
So, while it may look as if value investing has died a slow death over the past decade, the lack of performance from the factor has more to do with macroeconomics than the style itself. Going forward, only time will tell if value can return to its roots and consistently outperform. The one thing the style does have working in its favor is human emotion, and as Goldman notes, as long as humans remain active in the market, and make investment decisions, value investors will have an advantage:
“As long as humans make investment decisions, we believe value will continue to be a good long-term investment strategy, though returns may be harder to capture in the future than they have been in the past. Among the possible explanations for the historical value effect, one major theme is the tendency of humans to overprice growth profiles and other stock attributes. The increased use of passive investment tools combined with a widespread adoption of “smart beta” strategies suggest more elusive future returns to investors seeking value and other factor premia. However, the continued market presence of humans with diverse investment processes and goals suggests that some degree of the value effect will persist, particularly for disciplined investors with longer investment horizons.”
However, we would bet that the value investing is dead mantra is a bit premature and will be proven so as in the past.