Value stocks are gaining ground: Are your customers prepared?

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What would you like to know

  • Value stocks have shown signs of a comeback in 2021.
  • From a valuation perspective, value benchmarks are more attractive relative to their historical averages than growth indices.
  • A long / short equity fund offers protection against the broad market, while maximizing the gains from divergence in growth and value.

After a long stretch for growth stocks, the value has shown signs of a comeback in 2021, and many investors are wondering if this may represent a change of guard among investing styles.

Those in the value camp note several trends that could benefit stocks going forward, including an ongoing economic recovery and persistent signs of inflation. The latter could lead to a rise in interest rates, which penalizes the valuations of growth stocks more than the value.

From a valuation point of view, value indices are also more attractive relative to their historical averages than growth indices. Perhaps put simply, many believe that after growth stocks have outperformed value for more than a decade, perhaps it is time for that value to have its day.

Whatever the reason, if advisors and their clients believe that value is established over the longer term, a key question is: how do you best invest in the trend? It may not be as simple as making a modest shift in asset allocation towards value strategies. The reason: most value strategies still have a strong correlation with the broader market. For example, the Russell 1000 Value Index has a correlation of 0.95 and a beta of 1.00 with the Russell 1000 Index.

This means that an investor who moves towards value strategies will not see much difference in the returns of his portfolio compared to that if he had kept his original allocation or simply invested in an equity strategy. basic. And if markets fall – a concern for some investors given the current position of valuations – the high correlation means that the value-oriented portfolio will still bear a large chunk of market returns, even if it outperforms growth.

Another way to invest behind the trend is to use long / short equity funds or other alternative strategies that use factors as a basis for determining which stocks to sell.

Isolate the divergence

For advisers who believe value is about to outperform growth and want to invest behind the change, long / short equity funds may be a better option to isolate that view.


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