GMO paper on under-performance of value

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Forester
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GMO paper on under-performance of value

Post by Forester » Tue Aug 13, 2019 8:09 am

Comprehensive piece, for instance value stocks are remaining longer in the "value bucket" and so portfolio churn has been less beneficial. The author also concludes that value stocks today are no more or less "junkier" than in the past.

The last time the value quintile was this cheap relative to growth, was in 2000.

Risk and Premium: A Tale of Value by John Pease
https://www.gmo.com/americas/research-library/

From the conclusion;
......

The relative return of traditional value has been flat since late 2004. All in all, it has been a harrowing decade for those who have sought cheap stocks, and we have tried to understand why.

We approached this problem by decomposing the factor’s relative returns. The relative growth profile of value has not changed with time; the cheapest half (ex-financials) in the U.S. has continued to undergrow the market, but by no more than what we have come to expect.
......

The offsets to value’s undergrowth, however, have come under pressure. Value’s yield advantage has fallen as the market has become more expensive. The group’s rebalancing – the tendency of cheap companies to see their multiples expand and rotate out of the group while expensive companies see their multiples contract and come into value – is also slower, with behavioral and structural aspects both at play. Though these drivers of relative outperformance have diminished, they still exceed value’s undergrowth by more than 1%, indicating that going forward, cheap stocks (at least as we define them) are likely to reap a decent, albeit smaller, premium.

This premium has not materialized over the last decade for a simple reason: relative valuations. Value has seen its multiples expand a lot less than the market. This makes sense – because value tends to have significantly lower duration than other equities, a broad risk rally shouldn’t be as favorable to cheap stocks as it should be to their expensive counterparts. And we have had quite a rally. It isn’t possible to guarantee that the next decade will be kinder to value than the previous one was. The odds would seem to favor it, however. Cheap stocks still provide investors with a premium, allowing them to outperform even if their relative valuations remain low. If relative valuations rise – not an inconceivable event given a long history of mean-reverting discount rates – the ensuing relative returns will be exceptional. And value, after quite the pause, might look valuable again.

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Forester
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Re: GMO paper on under-performance of value

Post by Forester » Tue Aug 13, 2019 8:58 am

Measured by dividend yield, valuation gap is nearly the widest ever;

Image

https://www.bloomberg.com/news/articles ... s-discount

asif408
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Re: GMO paper on under-performance of value

Post by asif408 » Tue Aug 13, 2019 9:27 am

A followup is that value's underperformance in the last several years has mainly been a US phenomenon. Foreign developed and EM value underperformed for quite a while earlier this decade. Since mid January 2016 value has outperformed growth and blend in foreign developed and emerging markets if you compare the market cap indexes with the Schwab Fundamental index products: https://finance.yahoo.com/chart/VEA#eyJ ... In19fX0%3D

EM value has had nearly twice the return of the market cap EM index since January 2016, and has also beaten the US stock market since that time, even with the last year and a half of negative returns.

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Forester
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Re: GMO paper on under-performance of value

Post by Forester » Tue Aug 13, 2019 10:54 am

asif408 wrote:
Tue Aug 13, 2019 9:27 am
A followup is that value's underperformance in the last several years has mainly been a US phenomenon. Foreign developed and EM value underperformed for quite a while earlier this decade. Since mid January 2016 value has outperformed growth and blend in foreign developed and emerging markets if you compare the market cap indexes with the Schwab Fundamental index products: https://finance.yahoo.com/chart/VEA#eyJ ... In19fX0%3D

EM value has had nearly twice the return of the market cap EM index since January 2016, and has also beaten the US stock market since that time, even with the last year and a half of negative returns.
That's a great point. I wonder what the global value vs global growth picture is since 2010. Value should still be behind because the US has been on such a tear.

I believe value hasn't hurt that much if a US investor had been invested throughout this cycle, it's only since around 2014 that it's been very painful. My hunch, not that it's worth anything, is that the notion of the 'value premium' be will fully intact again by the middle/end of the 2020s. Then there will be another disruptive technological revolution and value will appear to be outmoded again :beer

asif408
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Re: GMO paper on under-performance of value

Post by asif408 » Tue Aug 13, 2019 12:25 pm

Forester wrote:
Tue Aug 13, 2019 10:54 am
asif408 wrote:
Tue Aug 13, 2019 9:27 am
A followup is that value's underperformance in the last several years has mainly been a US phenomenon. Foreign developed and EM value underperformed for quite a while earlier this decade. Since mid January 2016 value has outperformed growth and blend in foreign developed and emerging markets if you compare the market cap indexes with the Schwab Fundamental index products: https://finance.yahoo.com/chart/VEA#eyJ ... In19fX0%3D

EM value has had nearly twice the return of the market cap EM index since January 2016, and has also beaten the US stock market since that time, even with the last year and a half of negative returns.
That's a great point. I wonder what the global value vs global growth picture is since 2010. Value should still be behind because the US has been on such a tear.

I believe value hasn't hurt that much if a US investor had been invested throughout this cycle, it's only since around 2014 that it's been very painful. My hunch, not that it's worth anything, is that the notion of the 'value premium' be will fully intact again by the middle/end of the 2020s. Then there will be another disruptive technological revolution and value will appear to be outmoded again :beer
Outside the US the value funds I've mentioned have still underperformed since 2010, most significantly in EM: https://finance.yahoo.com/chart/VEA#eyJ ... 19fQ%3D%3D

The US value fund, OTOH, has only been underperfoming since late 2014. So it's easy to see from these graphs why foreign stocks in general, but especially foreign value stocks, are particuarly unpopular at this time, and why US value stocks are starting to lose interest. Assuming this time is not different, it appears the stars are beginning to align for value stocks worldwide.

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dmcmahon
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Re: GMO paper on under-performance of value

Post by dmcmahon » Tue Aug 13, 2019 9:55 pm

Aren’t financials heavily weighted in Value now? Things change - their business models are under pressure from technology, from shifts in consumer preferences towards the Boglehead model, and declining interest rates.

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