We recently published a blog post highlighting the fact that U.S. “Growth” stocks have dominated performance relative to “Value” stocks during the last several years. We are concerned about the narrowing of equity market leadership. Furthermore, we pointed out that style cycles have been a part of the equity markets since their beginning. The last period of sustained underperformance for value occured during the 1990’s. You may recall that many market experts were predicting a new investing “paradigm” in which value investing was dead. The 2000s soon arrived and the Dotcom bubble came to a screeching halt.
Could we be witnessing another cycle nearing its end? I am always leery when market pundits begin to speak about the demise of this style or that investing insight. Here we go again. The WSJ has published an article today questioning the future of “Value” investing. The use of Price-to-Book as a measure of value is being called into question because of accounting practices related to how intangible assets are treated. There may be some merit in this analysis, but there are many measures of value, such as P/E, Price to Sales, Price to Free Cash Flow, Price to Enterprise Value, etc. that have also failed to positively correlate with market leadership.
“There are important differences between then and now. Today, the economy is booming, inflation is low, regulatory restrictions on business have been eased and money flows into the stock market from a much larger segment of the population.” As you shake your head in agreement, realize that the above quote comes from a WSJ article from January 18, 2000, or less than 2 months before the Dotcom bubble burst! As you may recall, the Nasdaq Composite lost 78% of its value as it fell from 5046.86 to 1114.11.
We certainly aren’t smart enough to know when Growth investing will begin to underperform Value investing as a style or the magnitude of that underperformance, but it will happen. When it does, you are best to be in active equity strategies relative to the passive indexes. If there is one benefit from having been involved in this industry for almost 40 years, it is learning one simple fact that history does repeat itself when it comes to investing.