What is Value? Put simply, the Value factor aims to identify undervalued stocks. Market-cap indices can be prone to overweight highly valued stocks and underweight the lower valued, so Value investing will outperform if we have a reversal and these undervalued stocks return to their “correct” valuations (as their prices rise).
The last time we saw a sustained Value rally was in the early 2000s, in the wake of the dot-com boom. However, post the Global Financial Crisis (GFC) the factor has underperformed, now to a point where it has become too cheap to be ignored, looking like a historically attractive investment.
If Value has been underperforming relative to the benchmark, then some other stocks must have been outperforming - anti-Value. These stocks tend to be heavily exposed to the Growth and Quality factors. And, just as Value looks historically cheap, so Growth and Quality now appear historically expensive, leading some to call this a bubble like the dot-com boom, and similarly ripe for reversal.
Others contend that Value may remain lower for longer, in tandem with the interest rate environment that we have been experiencing since the GFC. As low interest rates are relatively more favourable to Growth than Value stocks, with rates looking to be pinned near zero or below for some time in the major developed economies, we could see Value continue to underperform relative to the benchmark.
In the rest of this piece we try and answer the central question by examining the major equity style factors in turn through the dimensions of valuation, sector exposures, and their connection to the interest rate environment.