Wondering why Value funds have done so poorly?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
itsmeagain
Posts: 35
Joined: Sat Jan 09, 2016 7:24 pm

Wondering why Value funds have done so poorly?

Post by itsmeagain »

The article linked below provides a compelling explanation of why Value has done so poorly relative to Growth for the last decade. It's not merely a matter of which sectors are in favor, nor the weighting to a few gigantic tech and tech-related stocks that have done extremely well (Amazon, Apple, Microsoft, and the like). Instead, Value investing has amounted to a large short position against dozens of the most disruptive companies, not merely tech per se. Think of Intel, Cisco, and IBM as old-school, non-disruptive tech companies now in the Value realm. Anyhow, I found this to be a very interesting and compelling article, worth a read for anyone interested in starting, maintaining, or abandoning a factor-based strategy.
https://www.sparklinecapital.com/post/v ... disruption
aristotelian
Posts: 8071
Joined: Wed Jan 11, 2017 8:05 pm

Re: Wondering why Value funds have done so poorly?

Post by aristotelian »

Kind of like international underperformance. It's a mystery. There is no theoretical reason why it should be true. At some point value will become a bargain and will look good again, but who knows when that will be.

viewtopic.php?t=324574
bling
Posts: 584
Joined: Sat Jan 21, 2012 12:49 pm

Re: Wondering why Value funds have done so poorly?

Post by bling »

i think it's less of a why value/international is doing so poorly and more of it why the top 4-5 tech companies are doing so well (they account for ~20% of the S&P 500 by market cap).
rascott
Posts: 2348
Joined: Wed Apr 15, 2015 10:53 am

Re: Wondering why Value funds have done so poorly?

Post by rascott »

There are plenty of non- tech, growth companies that have done very well.... so it's not just a tech phenomenon.
User avatar
arcticpineapplecorp.
Posts: 6207
Joined: Tue Mar 06, 2012 9:22 pm

Re: Wondering why Value funds have done so poorly?

Post by arcticpineapplecorp. »

i listened to a podcast recently (don't remember which) which used a prior period (don't remember, but a long time, perhaps the 90s) where value underperformed growth but then grew enough to outperform growth and all the outperformance was only attributable to just a one month period of time. In other words, had you not held on to value during that one month, you wouldn't have gotten that past outperformance of value relative to growth.

so value can underperform for a long time but then can come roaring back very quickly and make up (and then some) for years of underperformance. But you've got to be holding it when it comes. Most don't. They give up after years of lagging and don't get the premium that eventually turns up.

full disclosure, I hold total stock market index funds, no value tilt here. the stock market contains value and growth. that's good enough for me. I'll get the returns of both when they come.
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
Carol88888
Posts: 301
Joined: Wed Jan 24, 2018 2:24 am

Re: Wondering why Value funds have done so poorly?

Post by Carol88888 »

Value funds hold a lot of energy and financials and both these sectors have been terrible underperformers. Banks will come back when the interest rates rise - whenever that is.

And energy will come back when surpluses are depleted and economic growth picks up. I think it will take awhile.
bling
Posts: 584
Joined: Sat Jan 21, 2012 12:49 pm

Re: Wondering why Value funds have done so poorly?

Post by bling »

rascott wrote: Tue Sep 15, 2020 2:57 pm There are plenty of non- tech, growth companies that have done very well.... so it's not just a tech phenomenon.
i'm sure there are, but since they are so small relative to the index you might not even feel it.

here's an older article i just found:
https://www.ccn.com/sp-500-looks-awful- ... ch-stocks/

S&P 500 = 2% YTD
S&P 495 = -5% YTD

that's really significant...
garlandwhizzer
Posts: 2992
Joined: Fri Aug 06, 2010 3:42 pm

Re: Wondering why Value funds have done so poorly?

Post by garlandwhizzer »

I think this is a very thoughtful interesting analysis for both value and non-value investors. It clearly seems to have explanatory power for stock returns over the last 13 years. Thanks for posting, itsmeagain.

Value's striking underperformance during that span, the worst underperformance I suspect in 120 years, may be due to a paradigm economic shift to disruptive tech driven companies (although not necessarily classified as tech). These companies accelerate and accentuate the creative destruction inherent in a capitalist system. Basically the disruptors steal the markets of and eat the lunch of non-disruptors. It suggests that standard measurements of a value like PE, PB, PCF, DIV, past earnings growth, etc., totally miss the economic disruption factor which for the last 13 years has been driving stock performance either up (tech) or down (value). The asset-light tech disruptors thrive because they have what it takes to grow and transform, a very high level non-tangible intellectual property/innovation, which cannot be measured by the usual stock parameters above. It makes sense. Even Buffett has hoped aboard with APPL which is his best performing investment in recent years.

The unanswered question: is this an ongoing secular trend in the market and economy that still has years to run, or is it an isolated sentiment driven aberration like 2000-3 that will soon tire/go in reverse? Stay tuned.

Quote from article:
Conclusion
Value investing has rotated into a massive bet against technological disruption. This position cuts across diverse industries but can be isolated using machine learning. The anti-tech bet explains value’s ongoing drawdown. We suggest that value investors evolve their framework to accommodate the rising role of technology in our economy. Meanwhile, we believe allocators must invest in developing an informed view on technological trends in order to truly underwrite their value managers.
Garland Whizzer
garlandwhizzer
Posts: 2992
Joined: Fri Aug 06, 2010 3:42 pm

Re: Wondering why Value funds have done so poorly?

Post by garlandwhizzer »

I think this is a very thoughtful interesting analysis for both value and non-value investors. It clearly seems to have explanatory power for stock returns over the last 13 years. Thanks for posting, itsmeagain.

Value's striking underperformance during that span, the worst underperformance I suspect in 120 years, may be due to a paradigm economic shift to disruptive tech driven companies (although not necessarily classified as tech). These companies accelerate and accentuate the creative destruction inherent in a capitalist system. Basically the disruptors steal the markets of and eat the lunch of non-disruptors. It suggests that standard measurements of a value like PE, PB, PCF, DIV, past earnings growth, etc., totally miss the economic disruption factor which for the last 13 years has been driving stock performance either up (tech) or down (value). The asset-light tech disruptors thrive because they have what it takes to grow and transform, a very high level non-tangible intellectual property/innovation, which cannot be measured by the usual stock parameters above. It makes sense. Even Buffett has hoped aboard with APPL which is his best performing investment in recent years.

The unanswered question: is this an ongoing secular trend in the market and economy that still has years to run, or is it an isolated sentiment driven aberration like 2000-3 that will soon tire/go in reverse? Stay tuned.

Quote from article:
Conclusion
Value investing has rotated into a massive bet against technological disruption. This position cuts across diverse industries but can be isolated using machine learning. The anti-tech bet explains value’s ongoing drawdown. We suggest that value investors evolve their framework to accommodate the rising role of technology in our economy. Meanwhile, we believe allocators must invest in developing an informed view on technological trends in order to truly underwrite their value managers.
Garland Whizzer
000
Posts: 2785
Joined: Thu Jul 23, 2020 12:04 am

Re: Wondering why Value funds have done so poorly?

Post by 000 »

Value trade got crowded?
User avatar
Brianmcg321
Posts: 981
Joined: Mon Jul 15, 2019 8:23 am

Re: Wondering why Value funds have done so poorly?

Post by Brianmcg321 »

Get just a total market fund. Then you have growth and value and don't have to guess.

https://www.portfoliovisualizer.com/bac ... ion3_3=100
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.
User avatar
CardinalRule
Posts: 475
Joined: Sun Jan 15, 2017 11:01 am
Location: United States

Re: Wondering why Value funds have done so poorly?

Post by CardinalRule »

Carol88888 wrote: Tue Sep 15, 2020 3:45 pm Value funds hold a lot of energy and financials and both these sectors have been terrible underperformers. Banks will come back when the interest rates rise - whenever that is.

And energy will come back when surpluses are depleted and economic growth picks up. I think it will take awhile.
There are definitely a lot of energy and financial stocks in funds like VTV, even though they don't necessarily show up in in the "biggest holdings" list, due to their diminished value.

Month-end 10 largest holdings
(22.70% of total net assets) as of 07/31/2020

1 Johnson & Johnson
2 Berkshire Hathaway Inc.
3 Procter & Gamble Co.
4 UnitedHealth Group Inc.
5 JPMorgan Chase & Co.
6 Verizon Communications Inc.
7 Pfizer Inc.
8 Walt Disney Co.
9 AT&T Inc.
10 Merck & Co. Inc.
rascott
Posts: 2348
Joined: Wed Apr 15, 2015 10:53 am

Re: Wondering why Value funds have done so poorly?

Post by rascott »

CardinalRule wrote: Tue Sep 15, 2020 8:41 pm
Carol88888 wrote: Tue Sep 15, 2020 3:45 pm Value funds hold a lot of energy and financials and both these sectors have been terrible underperformers. Banks will come back when the interest rates rise - whenever that is.

And energy will come back when surpluses are depleted and economic growth picks up. I think it will take awhile.
There are definitely a lot of energy and financial stocks in funds like VTV, even though they don't necessarily show up in in the "biggest holdings" list, due to their diminished value.

Month-end 10 largest holdings
(22.70% of total net assets) as of 07/31/2020

1 Johnson & Johnson
2 Berkshire Hathaway Inc.
3 Procter & Gamble Co.
4 UnitedHealth Group Inc.
5 JPMorgan Chase & Co.
6 Verizon Communications Inc.
7 Pfizer Inc.
8 Walt Disney Co.
9 AT&T Inc.
10 Merck & Co. Inc.
And 1/5th of Berkshire is Apple!
usagi
Posts: 272
Joined: Wed Jun 05, 2019 1:08 am

Re: Wondering why Value funds have done so poorly?

Post by usagi »

As I recall the/our great mentor John Bogle effectively argued (paraphrasing here) that he did not see the alleged value premium and it was simply a blip based on the holding period you chose to study and reversion to the mean was the order of the day.

Jack was right; no surprise.

The world is dimmer without him, his sage wisdom, and personal decency and dignity.
langlands
Posts: 572
Joined: Wed Apr 03, 2019 10:05 pm

Re: Wondering why Value funds have done so poorly?

Post by langlands »

Thanks for this extremely interesting article.
User avatar
Peter Foley
Posts: 5113
Joined: Fri Nov 23, 2007 10:34 am
Location: Lake Wobegon

Re: Wondering why Value funds have done so poorly?

Post by Peter Foley »

I think the question is "relative".

Value funds have done poorly when compared to growth funds and the S&P 500 in general because the latter two are so dominated by a handful of high tech companies that have done well.
langlands
Posts: 572
Joined: Wed Apr 03, 2019 10:05 pm

Re: Wondering why Value funds have done so poorly?

Post by langlands »

Peter Foley wrote: Thu Sep 17, 2020 3:26 pm I think the question is "relative".

Value funds have done poorly when compared to growth funds and the S&P 500 in general because the latter two are so dominated by a handful of high tech companies that have done well.
Did you read the article? It's not just a "handful" of high tech companies. There's an actual "tech disruption" factor that seems to explain most of the underperformance. Once you take that out, there is almost no underperformance.
ljford7
Posts: 45
Joined: Tue Jul 06, 2010 8:15 pm

Re: Wondering why Value funds have done so poorly?

Post by ljford7 »

So when will the Tech disruption end? I would wager that it won't end until some very catastrophic event in the world (like WWIII or on that scale). We are on the verge of a driver less car revolution, an alternative energy revolution, an impact worldwide declining poverty rate, worldwide declining crime rate, etc. and you can point the finger at Tech being having a huge impact with all of those items.

Now that question is, does the Stock Market actually care and keep ramping up growth? I don't know, but I will not bet against it.

(On a personal note, I think the valuations are ridiculous for some of these companies and I wouldn't buy them as stock (hold them in an index), but personal beliefs and the Stock Market don't always correlate.)
User avatar
anon_investor
Posts: 3506
Joined: Mon Jun 03, 2019 1:43 pm

Re: Wondering why Value funds have done so poorly?

Post by anon_investor »

langlands wrote: Thu Sep 17, 2020 3:29 pm
Peter Foley wrote: Thu Sep 17, 2020 3:26 pm I think the question is "relative".

Value funds have done poorly when compared to growth funds and the S&P 500 in general because the latter two are so dominated by a handful of high tech companies that have done well.
Did you read the article? It's not just a "handful" of high tech companies. There's an actual "tech disruption" factor that seems to explain most of the underperformance. Once you take that out, there is almost no underperformance.
The answer for the performance of any fund since the GFC is FANG underweight, market weight or overweight.
langlands
Posts: 572
Joined: Wed Apr 03, 2019 10:05 pm

Re: Wondering why Value funds have done so poorly?

Post by langlands »

anon_investor wrote: Sun Sep 20, 2020 9:41 am
langlands wrote: Thu Sep 17, 2020 3:29 pm
Peter Foley wrote: Thu Sep 17, 2020 3:26 pm I think the question is "relative".

Value funds have done poorly when compared to growth funds and the S&P 500 in general because the latter two are so dominated by a handful of high tech companies that have done well.
Did you read the article? It's not just a "handful" of high tech companies. There's an actual "tech disruption" factor that seems to explain most of the underperformance. Once you take that out, there is almost no underperformance.
The answer for the performance of any fund since the GFC is FANG underweight, market weight or overweight.
Really? Where does ARKK fit in your model? Current ARKK holdings:

https://ark-funds.com/wp-content/fundsi ... LDINGS.pdf
User avatar
anon_investor
Posts: 3506
Joined: Mon Jun 03, 2019 1:43 pm

Re: Wondering why Value funds have done so poorly?

Post by anon_investor »

langlands wrote: Sun Sep 20, 2020 10:41 am
anon_investor wrote: Sun Sep 20, 2020 9:41 am
langlands wrote: Thu Sep 17, 2020 3:29 pm
Peter Foley wrote: Thu Sep 17, 2020 3:26 pm I think the question is "relative".

Value funds have done poorly when compared to growth funds and the S&P 500 in general because the latter two are so dominated by a handful of high tech companies that have done well.
Did you read the article? It's not just a "handful" of high tech companies. There's an actual "tech disruption" factor that seems to explain most of the underperformance. Once you take that out, there is almost no underperformance.
The answer for the performance of any fund since the GFC is FANG underweight, market weight or overweight.
Really? Where does ARKK fit in your model? Current ARKK holdings:

https://ark-funds.com/wp-content/fundsi ... LDINGS.pdf
That fund is what 5 years old?
User avatar
Taylor Larimore
Advisory Board
Posts: 29964
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: Wondering why Value funds have done so poorly?

Post by Taylor Larimore »

itsmeagain wrote: Tue Sep 15, 2020 9:52 am The article linked below provides a compelling explanation of why Value has done so poorly relative to Growth for the last decade. It's not merely a matter of which sectors are in favor, nor the weighting to a few gigantic tech and tech-related stocks that have done extremely well (Amazon, Apple, Microsoft, and the like). Instead, Value investing has amounted to a large short position against dozens of the most disruptive companies, not merely tech per se. Think of Intel, Cisco, and IBM as old-school, non-disruptive tech companies now in the Value realm. Anyhow, I found this to be a very interesting and compelling article, worth a read for anyone interested in starting, maintaining, or abandoning a factor-based strategy.
https://www.sparklinecapital.com/post/v ... disruption
itsmeagain:

Thank you for your post.

The answer to the underperformance of sector/factor funds is easy: Simply own a low-cost, tax-efficient, very diversified, broad market index fund like the S&P 500 or Total Stock Market. You will never worry about underperformance again.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- "Never think you know more than the market. Nobody does."
"Simplicity is the master key to financial success." -- Jack Bogle
Nicolas
Posts: 2220
Joined: Wed Aug 22, 2012 7:41 am
Contact:

Re: Wondering why Value funds have done so poorly?

Post by Nicolas »

Taylor Larimore wrote: Sun Sep 20, 2020 12:48 pm The answer to the underperformance of sector/factor funds is easy: Simply own a low-cost, tax-efficient, very diversified, broad market index fund like the S&P 500 or Total Stock Market. You will never worry about underperformance again.
Well said!
bck63
Posts: 1317
Joined: Fri Sep 28, 2018 4:59 pm

Re: Wondering why Value funds have done so poorly?

Post by bck63 »

garlandwhizzer wrote: Tue Sep 15, 2020 7:55 pm Value's striking underperformance during that span, the worst underperformance I suspect in 120 years, may be due to a paradigm economic shift to disruptive tech driven companies (although not necessarily classified as tech). These companies accelerate and accentuate the creative destruction inherent in a capitalist system. Basically the disruptors steal the markets of and eat the lunch of non-disruptors. It suggests that standard measurements of a value like PE, PB, PCF, DIV, past earnings growth, etc., totally miss the economic disruption factor which for the last 13 years has been driving stock performance either up (tech) or down (value). The asset-light tech disruptors thrive because they have what it takes to grow and transform, a very high level non-tangible intellectual property/innovation, which cannot be measured by the usual stock parameters above. It makes sense. Even Buffett has hoped aboard with APPL which is his best performing investment in recent years.
This is fascinating. Thank you. It would be interesting to know whether other disruptors throughout history behaved in the same way. For example, did the industrial stocks during the industrial revolution crush the "value" stocks of the day? And if so, how long did it last?
User avatar
Uncorrelated
Posts: 1054
Joined: Sun Oct 13, 2019 3:16 pm

Re: Wondering why Value funds have done so poorly?

Post by Uncorrelated »

The methodology looks like overfitting to me.
  1. The author observed that FAANG stocks outperformed.
  2. The author uses machine learning to identify stocks with similar company filings as FAANG stocks, which he arbitrary calls "disruptive".
  3. The author observes that after correcting for the "disruptive" factor, value underperforms less.
3 is tautological with 1. No evidence was offered that the disruptive factor is robust, works out-of-sample, has a theoretical basis, etc etc.
garlandwhizzer
Posts: 2992
Joined: Fri Aug 06, 2010 3:42 pm

Re: Wondering why Value funds have done so poorly?

Post by garlandwhizzer »

This discussion is about disruptive technologies so we need to know exactly what the term disruptive means with respect to tech stocks. The following is an article that examines this question. I don't think anyone would argue that AMZN hasn't disrupted the traditional bricks and mortar retail. It started by putting bookstores out of business. Remember bookstores? I miss them. Then book publishers got hit as Kindle intervened. Now all bricks and mortar retail even including grocery stores are at risk due to AMZN.

I do not believe these changes are good in a societal way. The unbridled hand of free capitalism constantly creates winners and losers. It's just happening a lot faster now. AMZN has widened the wealth disparity between the haves and the have nots by destroying low skill jobs in retail and sales. Ask Barnes and Noble if they think AMZN is disruptive. Likewise internet news and social media is in the process of taking market share from newspapers, publishers, and magazines. The rate at which this process occurs has exponentially increased IMO due to tech innovation. Tech, unlike most stocks, does not require the economy to grow in order to prosper. It takes market share from traditional businesses. It has eaten larger and larger slices of the stock market pie and the economic pie as time has passed for more than a decade. Tech is also highly addictive which offers some assurance that growing demand for it will persist in the future. It still has a bullet proof business model that even works in the midst of a global pandemic. Having said that I personally believe its extraordinary price action is overdone at present. Some air has come out of the TSLA bubble, but for market leadership to change, other sectors will have to show expectations of consistent and improving future profit growth which now is hard to find outside of tech.

https://www.investopedia.com/terms/d/di ... vation.asp

Garland Whizzer
000
Posts: 2785
Joined: Thu Jul 23, 2020 12:04 am

Re: Wondering why Value funds have done so poorly?

Post by 000 »

garlandwhizzer wrote: Mon Sep 21, 2020 6:51 pm This discussion is about disruptive technologies so we need to know exactly what the term disruptive means with respect to tech stocks. The following is an article that examines this question. I don't think anyone would argue that AMZN hasn't disrupted the traditional bricks and mortar retail. It started by putting bookstores out of business. Remember bookstores? I miss them. Then book publishers got hit as Kindle intervened. Now all bricks and mortar retail even including grocery stores are at risk due to AMZN.

I do not believe these changes are good in a societal way. The unbridled hand of free capitalism constantly creates winners and losers. It's just happening a lot faster now. AMZN has widened the wealth disparity between the haves and the have nots by destroying low skill jobs in retail and sales. Ask Barnes and Noble if they think AMZN is disruptive. Likewise internet news and social media is in the process of taking market share from newspapers, publishers, and magazines. The rate at which this process occurs has exponentially increased IMO due to tech innovation. Tech, unlike most stocks, does not require the economy to grow in order to prosper. It takes market share from traditional businesses. It has eaten larger and larger slices of the stock market pie and the economic pie as time has passed for more than a decade. Tech is also highly addictive which offers some assurance that growing demand for it will persist in the future. It still has a bullet proof business model that even works in the midst of a global pandemic. Having said that I personally believe its extraordinary price action is overdone at present. Some air has come out of the TSLA bubble, but for market leadership to change, other sectors will have to show expectations of consistent and improving future profit growth which now is hard to find outside of tech.

https://www.investopedia.com/terms/d/di ... vation.asp

Garland Whizzer
Although the top five tech stocks are richly priced, I think avoiding or excessively underweighting the overall tech sector (which almost any value strategy does) has a modest-to-high probability of continuing to be damaging to investor returns. This is the problem with going too far with tilts and smart beta strategies: no matter how much past data is mined, the future is always uncertain.

I will note that there are arguably some value plays still available in tech: INTC (I have a small position) and PSCT come to mind.
langlands
Posts: 572
Joined: Wed Apr 03, 2019 10:05 pm

Re: Wondering why Value funds have done so poorly?

Post by langlands »

000 wrote: Mon Sep 21, 2020 7:06 pm Although the top five tech stocks are richly priced, I think avoiding or excessively underweighting the overall tech sector (which almost any value strategy does) has a modest-to-high probability of continuing to be damaging to investor returns. This is the problem with going too far with tilts and smart beta strategies: no matter how much past data is mined, the future is always uncertain.

I will note that there are arguably some value plays still available in tech: INTC (I have a small position) and PSCT come to mind.
Does PSCT have a value tilt? It seems that it's just small cap tech.
000
Posts: 2785
Joined: Thu Jul 23, 2020 12:04 am

Re: Wondering why Value funds have done so poorly?

Post by 000 »

langlands wrote: Mon Sep 21, 2020 7:24 pm
000 wrote: Mon Sep 21, 2020 7:06 pm Although the top five tech stocks are richly priced, I think avoiding or excessively underweighting the overall tech sector (which almost any value strategy does) has a modest-to-high probability of continuing to be damaging to investor returns. This is the problem with going too far with tilts and smart beta strategies: no matter how much past data is mined, the future is always uncertain.

I will note that there are arguably some value plays still available in tech: INTC (I have a small position) and PSCT come to mind.
Does PSCT have a value tilt? It seems that it's just small cap tech.
No, no explicit value methodology but its current holdings are more valuely than the big 5 tech stocks.
Post Reply