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The tide is turning for value investing

The tide is turning for value investing

09-12-2019 | Insight

It will be ‘game on’ for value stocks next year after a miserable period for the investment style, says Portfolio Manager Josh Jones.

  • Josh Jones
    Josh
    Jones
    Portfolio Manager Boston Partners

Speed read

  • Value factor has underperformed growth for 11 years
  • Yield curve inversion traditionally ushers in a new cycle
  • Return to a value cycle seen starting in February 2020

The value factor has underperformed the growth factor since the end of the financial crisis in 2008. The trigger point for value coming back into favor has historically been the inversion of the US yield curve, when longer-dated bonds yield less than shorter-dated ones, and is traditionally seen as forewarning a recession.

The yield curve first inverted in May, and the first signs of value stocks outperforming growth stocks were seen a few months later in mid-August. If the business cycle follows the same path as when the yield curve has previously inverted, such as in 2000 when the dotcom bubble burst, the value factor will consistently outperform from early next year, Jones says.

“What has tended to happen historically is that the yield curve inverts and there's a big bounce for value afterwards, but then growth tries to reassert itself before value finally comes back in fashion,” says Jones, Portfolio Manager of the Boston Partners Global Premium Equities fund. 

“If you go back to 2000, the curve inverted in January and growth came back. But there was a huge reversal three months later in April, and the real value cycle finally kicked off in September. Value stocks were going up and even cyclical stocks were going up at that time.”

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Game on from February?

“I think the same thing is basically happening today. We saw the yield curve inversion in May, the bottom of the curve in August, and the over the next two months, growth tried to bounce back but failed. We had systematically underperformed in every single sector up until 15 August, and since then we have systematically outperformed in every single sector except financials. If it follows the same timeframe as before, by February next year, it will be game on for value.” 

And it may well be worth the wait, he says. “There has now been eleven years of underperformance of value compared to growth, and from our perspective, the last two have been highly destructive. What tends to happen is that episodically the value model underperforms, but when it turns, the future returns more than make up for it.”

“In 1999, the cumulative drawdown was about 25% and the value model went on to outperform by 50%. Between 2000 and 2008, a 12% drawdown was then followed by 35-40% outperformance for value. Historically, from this starting point, once the cycle has popped, it tends to be phenomenal.” 

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