Growth stocks, defined as those with underlying businesses growing much faster than GDP, flourished over the past decade. Tepid global growth, marked by aging work forces and declining productivity growth, put a high premium on those few sectors and companies with high secular growth, mostly in the tech driven digital economy. At the same time, extraordinarily loose monetary policies which drove real interest rates to negative levels around the world , sparked a speculative stock market frenzy, directed mainly to the most speculative “pie-in-the-sky” stories of technological disruption.
For value investors the environment of the past decade was devasting, and believers in the old “Graham and Dodd” mindset of fundamental investing became an endangered species. In recent years, business publications and academic journals were full of declarations on “The Death of Value.”
Metrics from Google’s search engine give an idea of the narrative that dominated the scene, as shown below.
Of course, we know that this kind of media attention is a contrary indicator. For example, we can be confident that any business publication cover declaring the certainty of any investment trend is good evidence for the end of that trend (e.g. The Economist has marked multiple peaks and troughs in the Brazilian stock market with its covers.)
So, it really should not be a surprise with regards to value investing that, as Mark Twain once quipped: “The reports of my death are greatly exaggerated.”
Lo and behold, over the past year value has made an impressive comeback.
Warren Buffett, the doyen of “Graham-and-Dodd’s-Ville, who had underperformed the S&P500 for over ten years, made a big comeback over the past year, outperforming the index by 16%, as we can see below. A simple value strategy of weighing the index by fundamentals (sales and profits) instead of market capitalizations also outperformed neatly.
The same has happened in emerging markets where, over the past year, EM value has had one of its best years ever relative to EM growth, leaving the vast majority of portfolio managers (today, almost all fully-declared growth investors or really “closet” growth investors) licking their wounds. We can see below that in every region of EM (except for the GCC, for classification reasons) value has beaten growth by a huge margin.
As in the case of the U.S., a simple strategy based on fundamentals instead of market capitalization also beat the index by a huge margin and outperformed 90% of active managers in emerging markets.
What the future brings, we don’t know. But, historically, regime changes in favor of value can last for many years. If we have really moved into a more inflationary environment, which is typically good for value, then perhaps value has a ways to go.