Just prior to the pandemic, the growth-fueled bull run made investors forget about value as high-flying technology stocks dominated the capital markets. Now, value is back in a big way, posting its best run in a 20-year span, according to Bank of America.
“According to Bank of America, this marks the strongest performance of value stocks relative to growth stocks in 20 years, since the aftermath of the dot-com bubble’s implosion,” a MarketWatch report said.
The economic environment was ideal for growth-oriented technology stocks to prosper given low interest rates. As such, mega-cap names like the FAANGs (Facebook, Apple, Amazon, Netflix, and Google) spearheaded the growth movement.
“For years, rock-bottom interest rates and negligible inflation motivated investors to plow money into mega cap technology stocks and other high-profile ‘growth’ names,” MarketWatch added.
That strength actually intensified following the market correction during the pandemic, but the rally hit a roadblock as 2021 started to close out. Inflation fears and rising rates altered the growth landscape, and investors sought more value amid the economic uncertainty heading into 2022.
“But since late 2021, the Federal Reserve’s plan to raise interest rates and rein in its balance sheet have prompted a dramatic reversal in this dynamic,” MarketWatch confirmed.
An Active Take on Quality and Value
Investors unsure on how to approach the value landscape can opt for an active management strategy inherent in exchange traded funds (ETFs) such as the American Century STOXX U.S. Quality Value ETF (VALQ). The fund is designed to offer core value exposure that dampens the cyclicality of value investing to pursue enhanced risk-adjusted returns versus market cap-weighted indexing.
Adjustments to value and income allocations seek to take advantage of prevailing market conditions. Allocation changes are based on analysis of risk-adjusted returns rather than pure price momentum, which helps the portfolio respond — but not overreact — to changing markets.
The byproduct of this methodology is a core value holding designed to stand up to market changes and pursue more consistent returns across the market cycle. VALQ applies an index-based methodology that seeks to identify stocks with key characteristics that represent the following:
- Quality companies with sound fundamentals, selling at attractive valuations.
- Sustainable income-payers to help mitigate risk when value investing falls out of favor.
- Diversified sector exposure and limited position size aimed at reducing risk.
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