When Value Performs Poorly

For investors who have experienced these poor recent results, a natural question is how value stocks have tended to perform relative to growth after periods of poor performance. Jared Kizer examines the data and shares his insights to help investors see the bigger picture.

In the U.S. stock market over roughly the last 10 years, value stocks have performed poorly relative to growth stocks. In fact, using Professor Ken French’s data, value appears to have experienced its sixth-worst drawdown ever over the period of January 2007–September 2018 with a cumulative underperformance of growth stocks of –32.2 percent. This contrasts with the long-term data showing that value stocks have outperformed growth stocks by 4.8 percent per year over the period of 1927–2017. For investors who have experienced these poor recent results, a natural question is how value stocks have tended to perform relative to growth after periods of poor performance.

Table 1 reports the 2007–2018 drawdown as well as the five others that were worse.

Table 1: Value Premium Drawdowns (7/1926–11/2018)

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Source: Ken French, Dartmouth College

**This information should not be considered as a demonstration of actual performance results or actual trading using client assets and should not be interpreted as such. The results may not reflect the impact that material economic and market factors may have had on the advisor’s decision-making in managing actual client accounts. Past performance is not a guarantee of future results. The benchmark indices are used for comparative purposes only and indices are not available for direct investment. Benchmarks are unmanaged, do not reflect any management fees, assume reinvestment of income, are for illustration purposes only, and have limitations when used for such purposes because they may have volatility, credit, or other material characteristics that are different from the investment strategies presented here.

Looking at the five-largest drawdowns — which are all from distinct, non-overlapping time periods — they all exceeded 30 percent with the largest being –43.5 percent over the period of September 1933 through March 1935. The 30 percent threshold means that in each of the five drawdowns, value stocks underperformed growth by at least 30 percent over some period of time with the shortest encompassing less than a year(!) and the longest covering more than four years.

Figure 1 plots the growth of $1 invested in the value premium over each of these five periods.

Figure 1: The Five-Largest Value Premium Drawdowns

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Source: Ken French, Dartmouth College

**This information should not be considered as a demonstration of actual performance results or actual trading using client assets and should not be interpreted as such. The results may not reflect the impact that material economic and market factors may have had on the advisor’s decision-making in managing actual client accounts. Past performance is not a guarantee of future results. The benchmark indices are used for comparative purposes only and indices are not available for direct investment. Benchmarks are unmanaged, do not reflect any management fees, assume reinvestment of income, are for illustration purposes only, and have limitations when used for such purposes because they may have volatility, credit, or other material characteristics that are different from the investment strategies presented here.

The above graphics show that in three of the periods value essentially went straight down while in two there was a significant recovery that was then followed by a reversal into an extension of the drawdown. We also see that some of the drawdowns occurred over relatively long periods of time while others did not.

PERFORMANCE AFTER VALUE PERFORMS POORLY

Before digging into some of the characteristics of the most recent drawdown, let’s take a look at how value has performed relative to growth after the five-largest drawdowns catalogued in Table 1. Table 2 presents the same drawdown statistic for each of the five periods but also presents the total returns to the value premium for the five- and 10-year periods after each drawdown period concluded.

Table 2: Total Returns After Value Drawdowns (7/1926–11/2018)

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Source: Ken French, Dartmouth College

**This information should not be considered as a demonstration of actual performance results or actual trading using client assets and should not be interpreted as such. The results may not reflect the impact that material economic and market factors may have had on the advisor’s decision-making in managing actual client accounts. Past performance is not a guarantee of future results. The benchmark indices are used for comparative purposes only and indices are not available for direct investment. Benchmarks are unmanaged, do not reflect any management fees, assume reinvestment of income, are for illustration purposes only, and have limitations when used for such purposes because they may have volatility, credit, or other material characteristics that are different from the investment strategies presented here.

Historically, we see that value has performed very strongly after periods of poor performance (albeit noting that some of these results during the 1930s overlap). This is perhaps not surprising but is helpful to see nonetheless. If we take averages across all five of the five- and 10-year horizons, total returns have averaged +82 percent for the five-year horizon and +115 percent for the 10-year horizon. In annualized returns, these are 12.7 and 8.0 percent per year, respectively. The numbers are nice to know, but the bigger point here is not that we should expect an exact repeat of these averages but rather simply understanding that the data is clear that value has historically done well after extended periods of poor performance.

THE 2007–2018 VALUE DROUGHT

As Table 1 shows, value has struggled mightily over the period of 2007–2018. In the U.S. market, value underperformed growth by 32.2 percent over the stretch of January 2007–September 2018. One interesting aspect of this period relative to the five that were worse is how long the most recent stretch covered, almost 12 years total. So how might value do from here? Of course it’s impossible to know for sure, but the results from Table 2 indicate it’s very reasonable to expect value to do well following the difficult period of 2007–2018.

This commentary originally appeared January 29 on MultifactorWorld.com

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