Within global equity markets, April saw value style indices outperform growth style indices. The relative return of one style versus the other would not typically be a significant event and the relative outperformance was just 1% according to the Russell Global Style Indices. However, the prolonged period of underperformance of the value style versus growth (a 5% difference over the last year and a 37% difference since 2005) and the associated headwind for equity investors with pronounced value style bias means that observers are in a mood to call for a change in trend.
Can we observe a similar pattern in active manager universe data? For reliable style universe data we look to the Morningstar US large cap value and growth peer groups. The median value manager has underperformed the value and broad market indices over the last five years while outperforming over one and three months. Meanwhile the median growth manager has lagged the growth and broad market indices over the last month after a prolonged period of outperformance over the broad index (the median growth manager rarely outpaces the growth index).
So perhaps we are onto something? It is important to remember that a value style index is a naively implemented strategy which will typically have high allocations to companies which are optically cheap on asset and earnings multiples. There is also a tendency for value style indices to hold high weights in cyclical industries when trailing multiples suggest value, because the equity market discounts a cyclical decline in earnings. We must therefore look to the underlying composition of the style indices.
When we do this, the picture becomes clearer. The largest sectors in the Russell Global Value Index are Financial Services and Energy – two beleaguered sectors which performed strongly in April.
So it appears that we are really looking at a sector effect. Peering further into the data can provide some support for this stance. The outperformance of value over growth in Latin America, again according to the Russell Indices was 9%, a much greater differential driven by the significant weighting in extractive industries within the Latam area. The picture is murkier in Asia ex Japan, a region with a much lower weight to Energy, but a high weight in Financials, particularly in China which rallied hard in April. The headline style indices suggest value also outperformed in April. However, the style team at UBS performs a much more granular assessment of style returns than the major index providers and they found that value styles continued to fare poorly across Asia.
Does any of this help us in managing our equity allocation? Emphasising value over growth is very different to implementing a valuation discipline – we would always argue in favour of the latter. Given the driver of style returns appears to continue to be sector, it makes more sense to spend time making sure stock and sector exposures are supported by a sound investment thesis. cheap hotels . With regards to manager selection, deep value managers with an unconstrained approach to sectors are the group with the most to gain from sector reversals – just be certain they are not holding value-traps enjoying a dead cat bounce.
This article first appeared in Wealth Manager magazine.