Following the harsh ‘quant winter’ of 2018-2020, spring sprung for value investing in 2021, especially over the first quarter. In similar, but more pronounced fashion, value has enjoyed another strong start to a year in 2022. Indeed, value stocks have significantly outperformed their growth peers year to date, supported by wide valuation spreads, heightening growth concerns for firms with lofty valuations,1 and the tailwind provided by the narrative around value and interest rates.
Figure 1 | Value is quick off the blocks in 2022
Source: Refinitiv, Robeco. The figure shows the cumulated return spread per calendar year between the top and bottom quintile portfolios of an enhanced value strategy. The investment universe consists of constituents of the MSCI Developed and Emerging Markets indices. Before 2001, we use the FTSE World Developed index for developed markets (going back to December 1985), and for emerging markets, the largest 800 constituents of the S&P Emerging BMI at the semi-annual index rebalance (going back to December 1995). The portfolios are equally weighted and rebalanced monthly. The sample period is January 1986 to April 2022.
But how does the current rally fare against the value resurgence witnessed following the tech bubble of the late 1990s? Figure 1 depicts the cumulative performance of the enhanced value factor2 per calendar year. Interestingly, 2022 marks the best start to a year in our sample period of just over 35 years, surpassing the strong performance that was seen at the beginning of the 21st century.
Value remains attractive both in absolute and relative terms
Despite the recent rally, the spread in valuation multiples between expensive and cheap stocks remains at exceptionally high levels, similar to those observed at the height of the tech bubble in the late 1990s. Moreover, value is also attractively priced in absolute terms as its forward price-to-earnings ratio is below 10x.
1 See: Wittenstein, J. April 2022, “Stock market meltdowns have FAANGs looking increasingly toothless”, Bloomberg.
2 We define value as in Blitz, D. C., and Hanauer, M. X., January 2021, “Resurrecting the value premium”, Journal of Portfolio Management. More specifically, the enhanced value strategy is based on a composite of book-to-market (R&D adjusted), EBITDA/EV, CF/P, and NPY metrics. Value stocks are sorted into quintile portfolios based on the valuation composite, in a region and sector neutral manner for developed markets and in a country neutral manner for emerging markets. Quintile portfolios are equal-weighted and rebalanced monthly. Our sample comprises the standard MSCI All Countries Index constituents, i.e., large and mid-cap stocks across both developed and emerging markets.