The Value of Value Investing
Why value now? In this podcast, WidsomTree's Tom Skrobe, Head of Product Solutions, and Jeff Weniger, Director, Asset Allocation, discuss why value, as an investment style, might be making a comeback.
Tom Skrobe: Hi, I'm Tom Skrobe, Head of Product Solutions at Wisdom Tree Asset Management. Today, we're going to talk about value investing. There's been a lot of debate recently about whether value as an investment style is making a comeback. Value is characterized by lower price levels relative to fundamentals such as earnings or dividends. Prices are lower because investors are less certain of the performance of these fundamentals in the ture. Growth, on the other hand, is characterized by higher price levels relative to fundamentals such as earnings or dividends. Price levels are higher because investors are willing to pay more to their expectations or future improvements in these fundamentals.
Value versus growth is a debate as old as stock investing itself. And while both investment styles have the potential to outperform, they have tended to do so at different times. At Wisdom Tree, we believe it may be time for a value comeback. Why value, and why now? On this podcast, we'll answer those questions with Jeff Weniger, Senior Investment Strategist at WisdomTree Asset Management. So, let's just kick it off. Why value? Why now?
Jeff Weniger: And “why now?” would be the question that is particularly pertinent in 2020. One of the things that I've noticed through the years when we’re conducting research on this binary question, the question that has always been the key determining factor for a portfolio is, will growth stocks beat value stocks or the other way around? And, what we've concluded, is that oftentimes these things run in these seven, eight, nine, 10-year cycles. It was value in the 1980s, was growth in the 90s, value in the 2000s. And then really since the crisis, I mean, Tom, I was starting my career around the crisis. I've known basically, as a man pushing 40 years old, nothing but growth stocks beating value stocks. So, there's a considerable proportion of this industry that has never really seen a value rally. Yeah, a value cycle. And what we were doing, I mean, before we came walking in here, I was with a bunch of the other members of Research and we we’re looking at the discrepancy over the generations between high price-to-earnings (P/E) and low P/E stocks. And what we've been hammering the table about is, if you look at the last 10 years, if you break the stock market into five groups (U.S., selected from the CRSP database), highest group by PE, lowest group by P/E, the order of magnitude by which the high P/E growth stocks have beaten the low P/E value stocks in the 10 years to today, I mean, basically the post-crisis years, it now exceeds the 10 years to March of 2000, the Dot-Com years. This is data, Tom. This is data back to the Eisenhower administration (January 1953 – January 1961).
Tom Skrobe: So, what does that feel like? What's the performance difference between value and growth over the past 10 years?
Jeff Weniger: Well, between the high P/E and low P/E stocks, it's 2.9 percent over year, and that exceeds the 2.7 percent in the 10 years from 1990 to 2000.
Tom Skrobe: So, has there been any evidence of value in the recent period of outperforming growth? Have you noticed that it is kind of making a comeback or do you see any time period in the last six months where value has actually outperformed growth?
Jeff Weniger: It caught—it caught a tailwind. If you go back, we believe that we can actually pinpoint a date to when the transition began. We believe that date is August 27th of ’19. That’s when, in the bond market, yields posted there, they're low. It seems like ancient history with all the news cycle that we have, the 24-hour news cycle. But at the time it was all about yield curve inversion. And we're generally pretty flat and close to inverted right now. But yields on the 10-year treasury bottomed then, on August 27th, and that was the absolute bottom—at least in the near term—between value stocks and growth stocks. Now, in 2020 we got off to the races in growth stocks because 2020 started with the coronavirus. And when you have a coronavirus, everybody gets into growth stocks because they're trying to find the safety and security of these groups. But nonetheless, even still, despite the outperformance of growth relative to value in these early stages in 2020, value has been beating now for about a half of a year. And if you go back to the prior times, I mean, if you look at the last value cycle, which commenced in March of 2000, that ended in October of ’07. So, you had basically about seven years of value beating. And if we look at the grand scheme of things, when value is working, which is about two thirds of the time when you're looking at a century of data or so. When you look at the grand scheme of things outside of WisdomTree, Ned Davis to a study from 1972 to the present, they said that dividend payers, for example, and dividend payers had beaten non-payers (Source: Ned David Research and Hartford Funds, 1/31/1972 – 12/31/208. Stocks within the S&P 500). This was from 1972 to 2018. So, it actually included a lot of the period of time where dividend payers were not doing so well compared to growth stocks, but even including that period, they beat them by 6 percent a year dating back to the Nixon administration (January 1969 – August 1974) to present.
Tom Skrobe: I mean, you mentioned that high P/E stocks have beaten low P/E stocks over the period for about 2.5 percent. How is that different from the last time growth was outperforming value? I recall it was more drastic. Is that the case?
Jeff Weniger: More drastic depending on which market internals you're looking at. So, if you were to take something like the Nasdaq composite in the 1990s—the classic growth cycle that really commenced mid ‘90s with the Netscape IPO, which now seems like dinosaur times, and Netscape a quarter century ago. Yes, a much wider discrepancy. I mean, you had considerable rallies. And in those references, I was really talking about the broad market, S&P 500, Russell 3000 type broad market indexes. But yet, back then, the Nasdaq went absolutely parabolic. The Nasdaq index went above 5000. And what was so interesting is, and I think that this is something that is increasingly catching some eyes, the case for value in many respects in the current cycle is almost a draw down mitigation. You know, the leaders in a bull market are oftentimes the ones that lead to the downside in a bear market. So, the Nasdaq did what the Nasdaq was going to do in the 1990s. And then, when it's time for the Nasdaq to rollover, it went down 77 percent. These are career ending losses. If you look at the performance of value stocks, I mean you're still bleeding brutally, but they were down 38 percent, something like the S&P 500 Value. And this is in a span of 2.5 years. Something with a million dollars in the Nasdaq was down to 230K. I mean, it's a wipe out, a total wipeout. And so, when you get into this market, stuff is trading at 50, 60, 70 times earnings, and then you see on the other side of the spectrum, classic value sectors like energy and materials where they've just been completely unloved. Financials is also fitting that bill, because everybody thinks that interest rates will be forever low, and there's no marginal propensity for interest rates to rise. We are at we are at one of those generational type extremes. And the question is, where do you want to be if the market shouldn't end up getting a hiccup or finding some downside? I think that it's one of those classic tidewater on the ocean going out, who doesn't have the bathing suit? It would seemingly be the growth stocks.
Tom Skrobe: It's hard to predict when this will take shape for longer periods of time. So, you mentioned that you started noticing in August that value was outperforming growth. A little bit of a hiccup in the beginning part of this year, mostly because of, you know, a non-market related concern, which is the coronavirus.
Jeff Weniger: Right.
Tom Skrobe: So are you saying that if you believe that value is making a comeback, and we have some evidence last year, maybe not as much this year, but if you did believe that, what WisdomTree products would you consider allocating to take advantage of those trends? It's hard to time the market, especially at a time, you know, growth versus value. You mentioned specific sectors that would lead the way in this value rally. What WisdomTree products would you consider, if you believe that value was making a comeback?
Jeff Weniger: Well, in U.S. value, we would go with the “Ds”. I call them the “Ds”. It’s the three letter ones that start with “D”. So, in large, mid, and small it's DLN (WisdomTree U.S. LargeCap Dividend Fund), DON (WisdomTree U.S. MidCap Dividend Fund), and DES (WisdomTree U.S. SmallCap Dividend Fund). Those would be the obvious ones. They are the ones that I would put most head-to-head with, for example, the Russell’s and the S&Ps for a value style box.
Tom Skrobe: So, the “Ds” are reaching for higher income or higher dividends. What makes them value?
Jeff Weniger: They’re value in that by nature of having a higher dividend than the broad market they tend to be the cheaper companies, so, you'll tend to see lower price-to-earnings ratios. One of the critical things about the “Ds”, DLN or DON or DES, is that they are not really hunt for yield products. You know, where someone says, I want some exorbitant yield, that often means exorbitant risk. That's not really what the nature of these. These are just dividend weighted. So, what they do is they do look like the broad market, except there's just skews more towards the ones that are paying the dividends and away from the ones that don't. If you have no dividend, you're not included in this. So, think about that. The company that has no dividend might be those types of companies that are 100 times earnings. And you look at some of these sectors right now, the hot high-flyers, you see it every day in the news cycle, those are tending to be the ones that are excluded—the landmines, the ones that are moon shooting—we won't participate in the upside and we don't participate.
Tom Skrobe: So, in summary, let me just wrap this up. You know, we see evidence of value outperforming growth late last year, in the earlier part of this year, you know, with that with the virus, it may have taken a backseat to that trend, but we're confident that eventually value will come back, and WisdomTree’s dividend-weighted suite is a great way to take advantage of that trend. Thanks again, Jeff, today. Look forward to talk to you soon.
Jeff Weniger: Thanks, Tom.
Inverted yield curve: Inverted Yield Curve: An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality.
Nasdaq Composite: A stock market index of the common stocks and similar securities listed on the Nasdaq stock market.
Price-to-earnings (P/E) ratio: Share price divided by earnings per share. Lower numbers indicate an ability to access greater amounts of earnings per dollar invested. A higher number indicates that a company's stock is over-valued.
S&P 500 Growth Index: A market capitalization-weighted benchmark designed to measure the growth segment of the S&P 500 Index.
S&P 500 Value Index: A market capitalization-weighted benchmark designed to measure the value segment of the S&P 500 Index.
Style: Morningstar defines its style box along two axes—large, mid-cap and small, as well as value, blend and growth. If two strategies are in the same style box, it does not mean that they hold the exact same portfolios, but it means that it might be harder to generate significantly different returns, as compared to strategies in different style boxes.
Yield curve: Graphical Depiction of interest rates on government bonds, with the current yield on the vertical axis and the years to maturity on the horizontal axis.
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Tom Skrobe and Jeff Weniger are representatives of Foreside Fund Services, LLC.