Borne in academia and raised by fund managers seeking to outperform, value style mutual funds and ETFs today hold close to $2 trillion.[1] But with poor returns over the past decade, the question of whether value as an investing style and factor is dead has become a popular topic of conversation. The search term “is value investing dead” generates over 23 million results in less than 0.38 seconds! For comparison, searching for “FAANG Stocks” generates just 570,000 results.[2] Perhaps it’s because FAANG is a funny acronym for financial news shows to utter rather than a well-documented investing style with academic rigor associated with its outperformance dating back to 1926,[3] launching many careers both within the classroom and on Wall Street.

Fueling the debate, value[4] is underperforming the market again this year. If nothing changes, 2018 would mark the sixth year of underperformance in the last decade. This is notably different than value’s excess return to the market historically, which has essentially been a coin flip with value underperforming only 49% of the time over the last 39 calendar years.[5] But let’s look beyond calendar-based returns to examine some trends and cyclical shifts to gain some insight into how value might perform, and possibly come back to life in 2019.

Source: Bloomberg Finance L.P., as of 11/15/2018.

Ten years later, where has value gone?

In spite of its recent track record, value is not dead. It’s just been wounded a few times since the financial crisis, as investors favored growth-oriented segments of the market amidst easy monetary policy. In the early years of value’s lost decade, low long-term interest rates helped lift growth stocks as their future cash flows became more valuable due to the lower discount rate. Bank stocks, the highest weighted value sector in the past 10 years (24%), also didn’t perform well as a result of the low rate era. At the same time, oil prices became erratic, falling 78% from peak to trough over the last ten years, hampering one of the larger sector weights in value (13%).[6]

Sector biases can play a role in broad-based value strategies over short-term horizons. For example, one of value’s four positive performing years in the past ten was 2016 when oil prices rallied by 85% and the market began to fully price in the Federal Reserve’s expected interest rate hikes.

Over the more recent three-year period, the flattening yield curve has weighed on value’s performance relative to the broader market—exuding an 88% correlation to the spread between the 10- and 2-year yield,[7] an uptick over the average for the last 10 years. Lastly, being underweight high growth large-cap tech and consumer discretionary stocks was the straw that broke value’s back.

Source: Bloomberg Finance L.P., as of 11/15/2018 based on holdings of Russell 1000 Value and Russell 1000 Index from 04/2009 to 11/15/2018.

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