Another Top Sign?
Is Value Investing Dead? By Ian McGugan, The Globe And Mail
Value investing isn’t dead. It is, however, comatose and surrounded by grieving relatives.
I know, I know: This is not what most value investors (and I’m one) want to hear. Benjamin Graham showed that you could have made big profits by buying cash-heavy, asset-rich stocks during the Great Depression. Ever since then, value investors have figured they could earn lush returns by loading up on stocks that are cheap in comparison to their earnings and book values. Academic research has largely concurred that value wins.
But is that true lately? Not so much. The Russell 3000 Value Index, which tracks the bargain end of the U.S. stock market, has fallen badly behind its growth index over the past couple of years. Heavy holdings of bank stocks have weighed on the value index, while the growth index has surged on its exposure to hot sectors like technology and pharmaceuticals.
However, it’s not just recent market fads that are making bargain-hunting investors feel blue. Jason Hsu, co-founder of Research Affiliates, looked at returns over the past couple of decades from U.S. equity funds that describe themselves as value-oriented. He found they returned an annual average of 9.4% from 1991 to 2013, barely edging out the 9% return produced by the Standard & Poor’s 500 Index. At least for fund investors, the extra return from pursuing a value strategy seems to have collapsed to next to nothing.
There are several ways to explain this. One is that interest rates have fallen over the past generation. Easy money helps to fuel growth companies. It also helps to keep even troubled companies afloat, which means one attraction of value stocks—a greater ability to withstand financial stress—might not matter as much as it once did.
Value may also be waning because the market is getting smarter. Back in the 1940s and 1950s, classic value investors like Graham and the young Warren Buffett had to dig painstakingly through financial statements to find businesses that could meet simple but demanding criteria
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