A Revival In The Performance Of Value Stocks Masks An Evolution In The Storied Investment Strategy
The long-awaited rotation from growth to value has arrived. At least this is what many value investors believe.
With this (potential) rotation comes a renewed debate about the future of value investing that will shape the philosophy’s evolution for years to come.
Many stock market pundits and value investing advocates believe that value stocks—stocks often categorized by their low price-to-earnings or price-to-book multiples—are poised to reverse a long period of underperformance relative to their faster-growing peers.
At the same time, growth-oriented strategies have seen an uncharacteristically rough stretch since the beginning of the year. Cathie Wood’s Ark Invest has been a clear example of how the reversal has affected growth strategies.
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Investors cite many reasons for this belief. Value stocks should see their earnings power benefit more from an economic recovery. Price discrepancies between growth and value have reached extreme levels. There is also the potential for fiscal stimulus and economic recovery to engender higher inflation and a rise in interest rates. Higher interest rates have a disproportionately negative effect on assets with longer duration cash flows, and since the valuations of growth stocks depend on cash flows expected far into the future, the belief is that higher interest rates will cause capital to move incrementally into cheaper shares with cash flows of shorter duration.
While I have been a strong advocate for value stock investing and agree that many value stocks should perform well in 2021, I believe there is an element to the value versus growth debate that requires further exploration.
And that element centers on the definition and evolution of value investing itself.