Value to outperform for the next decade
The deviation between value and growth is at a similar size to the height of the dotcom boom, according to Vanguard.
When this bubble popped, the firm said, value stocks went to outperform growth for the next five years.
There was currently a rotation happening between growth and value, after years of underperformance by value, and investors were price conscious and moved into stocks which were trading at low valuations with high dividend yield. This included sectors such as energy, basic materials and utilities.
“The large deviation of growth-stock valuations relatives to our fair-value estimates helps make our case. The size of the deviation is similar to one at the height of the dot-com bubble, when the bubble popped, value proceeded to outperform growth by 16% annualised over the next five years,” said Vanguard.
“Corporate profits should strengthen amid economic recovery from the pandemic. Still, their impact on the ‘fair value of value’ may be modest. The ultimate driver of the rotation to value stocks, then, is apt to be a change in investors’ appetite for risk.”
In light of this, Vanguard said it expected value to outperform growth over the next 10 years by five to seven percentage points, annualised, and possibly by a larger margin over the next five years.
In the US, the Russell 1000 had returned 23% over one year to 19 May compared to returns of 26.9% by the Russell 1000 Value index over the same period.
AUTHOR
Laura Dew
Recommended for you
Bennelong Funds Management chief executive John Burke has told Money Management that the firm is seeking to invest in boutiques in two specific asset classes as it identifies gaps in its product range.
Responsible investment performance concerns have lessened as the market hits $1.6 trillion in AUM, according to RIAA’s annual report, but greenwashing fears among asset managers are on the rise.
Research by Morningstar has found fixed income funds are bucking a general trend around managed fund fee dispersion with a smaller fee dispersion compared to equity ones.
As investors seek to diversify their portfolios, the naming of bond labels has broadened out to include green, social and impact bonds, according to the annual RIAA report.
