Tony Dye was a fund manager in Britain in the 1990’s who became known for his controversial bullish position on value stocks during a time period when high flying tech stocks were the talk of the town. After his firm was ranked the 2nd worst performing amongst Britain’s institutional fund managers, he was fired. Days later, the bubble burst and once again value stocks began to outperform.1
Ted Aronson, another well-known value investor who founded AJO Partners in 1984 and grew the firm’s assets to $31 billion before the 2008 financial crisis, closed his shop in October of 2020. “The drought in value – the longest on record – is at the heart of our challenge,” Mr. Aronson wrote to clients. “We still believe there is a future for value investing; sadly, the future is unlikely to arrive fast enough – for us.”2
For Mr. Aronson, and many other investors, they simply couldn’t take the pain any longer. The 1-year period ending September 2020 was the worst ever for value stocks relative to growth and for small cap value stocks in respect to large cap growth stocks. The 3-year numbers were also record breaking, as we saw growth stocks outperform value stocks by 24%, the largest dispersion ever, and a -28% differential between small cap value and large cap growth stocks, again, the largest ever.3
However, similar to Dye in the 1990s, it looks like the celebrated value investor leaving the helm he once reigned is a contrarian indicator. In the months following the closure of AJO Partners, we experienced the best 6-month period for value stocks relative to growth stocks since 1943, a 39% return difference. It’s been a similar story for small cap value stocks, as they returned 77% compared to 15% for large cap growth stocks.4
Now, many are wondering if they’ve missed the boat. The good news is, when evaluating returns going forward the same basic logic applies. Historically, the stocks of smaller companies have outperformed those of larger companies and relatively inexpensive stocks have outperformed more expensive stocks. The theoretical premise for investing in value and small cap securities is just as valid today as it was yesterday, last year, or even ten years ago.
Additionally, looking back at the historical data can be helpful when forming expectations. In the 1-year following a 6-month period where small cap value stocks outperformed large cap growth stocks by 20% or greater, the average return differential is 12.7% in favor of small cap value stocks. In the 3-years following, small cap value stocks outperform large cap growth stocks by 9.9%, and in the subsequent 5-years the premium is 7.0%.5
While we don’t know for certain what the returns will be going forward, we know realized returns are volatile, and the best way to capture the premiums is by having consistent exposure.
Too often, news headlines distract us from taking the long view. They create a sense of urgency around what’s happening in the market right now, Mr. Dye and Mr. Aronson are cases in point. But we have nearly a century’s worth of data, and decades of financial science, to look to for guidance. Throughout market history, investors have repeatedly abandoned these simple principles during periods where bull market advances seemed to defy logic. Ultimately, those investors paid a price for their speculation and not sticking to their long-term plan.
Source: Dimensional Fund Advisors
3 Value stocks performance is measured by Fama/French US Value Research Index. Growth Stocks performance is measured by Fama/French US Growth Research Index. Small Value stocks performance is measured by Fama/French US Small Value Index. Large Growth stocks performance is measured by Fama/French US Large Growth Index. Data from Returns Web.
4 Represents returns from October 2020 – March 2021
5 Represents returns from July 1926 – March 2021