Value’s continued resurgence is predicated upon two main variables:
- A reflating of the economy, benefiting rate sensitive equites – correlation and beta profile (55%/ 0.30) to rates is higher than both the market and growth disciplines (34%/0.12 and 27%/0.11, respectively)
- Above market growth, plus attractive valuations at a time of stretched metrics elsewhere – Earnings-per-share growth (25%) is above that of growth styles (20%) and the market (24%). And relative valuations for S&P 500 value stocks are in the bottom decile across Price-to-Next-Twelve-Month-Earnings Ratio, Price-to-Book Ratio, and Price-to-Sales Ratio compared to top decile for S&P 500 growth stocks.
With both macro variables likely to persist amid this renewed higher reflationary rate regime, the value rally may have more room to run. Not to mention, value stocks are starting to exhibit strong price return momentum. A simple sort of the top 100 S&P 500 stocks based on 12-1 momentum screen now has 9% overlap at the end of February to the highly concentrated S&P 500 Pure Value Index, up from 3% at the start of the year. A more intermediate momentum score of 6-1 leads to higher overlap, currently 40% versus 18% at the start of the year.
Overall the value rally has been strong and broad-based, no matter the definition. If this rally does continue, investor positioning toward these more rate sensitive equities may provide strong above market returns while at the same time mitigating the effects of the rate reflationary regime shift on broadly allocated portfolios.
Originally published by State Street, 3/10/21
1 Based on the returns of the S&P 500 Pure Value Index and the S&P 500 Index based on data from 1995 per Bloomberg Finance L.P. as of February 28, 2021
2 There are other differences in construction in terms of the descriptors used that can lead to deviations beyond sector effects, but sectors do have a meaningful impact on the differences in active risk
3 Based on the returns of the MSCI USA Value Select Index (non-sector neutral) and the MSCI USA Value Enhanced Index
4 Brinson attribution refers to performance attribution based on active weights. There are different variations, but the effects usually include allocation, security selection, currency, and potentially others.
5 Price-to-Book, Price-to-Sales, Price-to-Earnings, and Price-to-Next-Twelve-Month Earnings
6 In earlier analysis we used one metric as we are comparing intra-sector so we are comparing against like stocks that may be impacted by some of the valuation metrics shortcomings in a similar way (i.e. P/B to tech stocks would understate intangibles of tech firms, but it is done equally). For comparing across sectors where certain valuation metrics may provide corner results due to biases (e.g., intangibles) a composite approach is more robust.
7 For simplicity used end of month rebalancing even though that introduces timing luck.
8 Bloomberg Finance L.P. as of February 26, 2021 based on the monthly returns of the S&P 500 Pure Value Index, S&P 500 Pure Growth Index, and S&P 500 Index versus the US 10 Year Yield from 2/2016 to 2/2021
9 FactSet as of February 26, 2021 Price-to-Next-Twelve-Month-Earnings Ratio, Price-to-Book Ratio, and Price-to-Sales Ratio for S&P 500 Value Stocks are below the 10th percentile relative to the S&P 500 over the past 15 years
11 Most recent 12 months return minus the most recent month
12 Approximately 120 holdings
13 Most recent six month return minus the most recent month
The views expressed in this material are the views of SPDR Americas Research Team and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
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All the index performance results referred to are provided exclusively for comparison purposes only. It should not be assumed that they represent the performance of any particular investment.
Passively managed funds hold a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. Passively managed funds invest by sampling the index, holding a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. This may cause the fund to experience tracking errors relative to performance of the index.
Actively managed funds do not seek to replicate the performance of a specified index. The strategy is actively managed and may underperform its benchmarks. An investment in the strategy is not appropriate for all investors and is not intended to be a complete investment program. Investing in the strategy involves risks, including the risk that investors may receive little or no return on the investment or that investors may lose part or even all of the investment.
Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions.
Volatility management techniques may result in periods of loss and underperformance may limit the Fund’s ability to participate in rising markets and may increase transaction costs.
A momentum style of investing emphasizes securities that have had higher recent price performance compared to other securities, which is subject to the risk that these securities may be more volatile and can turn quickly and cause significant variation from other types of investments.
Investments in small-sized companies may involve greater risks than in those of larger, better known companies.
Companies with large market capitalizations go in and out of favor based on market and economic conditions. Larger companies tend to be less volatile than companies with smaller market capitalizations. In exchange for this potentially lower risk, the value of the security may not rise as much as companies with smaller market capitalizations.
Value stocks can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.
Because of their narrow focus, sector funds tend to be more volatile.