Right now, money managers and consultants think value is not only performing poorly, but continued gains by growth stocks are making things look relatively worse.
“At the moment, value seems to be stuck in the middle of a historic tech revolution, and the ongoing seismic effects of the GFC that are still reverberating through very low interest rates and flat yield curves,” Aon’s Mr. Yesildag said.
Growth stocks have dominated the COVID-19 recovery, said Damian Handzy, Boston-based chief commercial officer at analytics provider Style Analytics Ltd. “You couldn’t have designed a worldwide event to benefit one company better than COVID benefits Amazon.”
Mr. Handzy said U.S.-based growth stocks have an “additional phenomenon” helping them out — a regulatory environment over the past decade or so allowing “these large tech companies … to gobble up small competitors and really create monopolies for themselves. Combine that with the low-interest-rates environment and there’s good reason for these tech giants to continue growing and increasing their market share and stock prices.”
But market participants are still looking for the silver bullet that will facilitate value’s comeback in its own right — although managers warned that may be hard to find.
“It won’t surprise you that people are trying to find a catalyst to make value return to greatness. While we can devise a nice-sounding story … around what has happened and why, the reality is when you try and test whether that story holds true in the past, that doesn’t work,” Mr. Murphy said.
Take the argument that higher inflation should bring value to the fore. “One market where there is significant deflation is Japan … (where) value investing has worked,” he said.
“Markets defy easy stories — simple stories that people tell themselves are just that. Fairy tales. The market doesn’t listen to your stories,” Mr. Murphy added.
A hot topic in the investment industry right now is whether value should be redefined in order to help facilitate a comeback. The argument largely focuses on the use of price-to-book as the main measure of a stock for value investing.
“It’s an area that requires further research, but one of my arguments for price-to-book not working very well is that book value is the value of a company on a balance sheet. But intangibles have grown on the balance sheet,” Aon’s Mr. Yesildag said.
While it’s easy to value a building, machinery or equipment, intellectual property and brand are increasingly important parts of a company’s worth, he said. “These things matter much more and are subject to very different accounting treatments.”
Free cash flow yields may be a better measure. “Our analysis shows that over the last 30 years, the increasing impact of the intangibles on the balance sheet really does make (price-to-book) less of a strong indicator for values than cash-flow yields,” Style Analytics’ Mr. Handzy said.
A combination of metrics is a better approach, sources said.
Schroders’ value team uses cash flows for investing rather than price-to-book. Until early 2019, the team outperformed the market, but in 2019 and 2020, performance has been “poor and that has put a dent into the long-term performance,” Mr. Murphy said. Schroders runs about £9 billion ($11.5 billion) in assets across global value strategies.