Should we stay invested in value stocks with growth outperforming so far in 2023?How To Invest Markets & Economy
The value premium showed up strong over the last few years ending December 2022 following a weak stretch in the years prior, as highlighted in the right and middle columns of Exhibit 1 below. Through Q1 2023 growth stocks have outpaced value stocks with the Russell 3000 Growth Index returning 13.85% compared to the 0.91% return for the Russell 3000 Value Index. This recent short stint of growth outperformance may be prompting investors to question “Is the latest value run over?”
It's helpful to take a step back from the last handful of years and look at the performance of value vs growth over the long haul. The left column of Exhibit 1 shows the performance of value versus growth over nearly 100 years. During this period, value outperformed its growth counterpart by 3.0% annualized, providing strong empirical support for the value premium.
|Exhibit 1: Recent Value Performance in Context|
Annualized Returns, July 1926 – December 2022
Performance data shown represents past performance and is no guarantee of future results. Value and growth stocks represented by the Fama/French US Value Research Index and the Fama/French US Growth Research Index, respectively. The Fama/French Indices represent academic concepts that may be used in portfolio construction and are not available for direct investment or for use as a benchmark. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Returns provided by Ken French, available at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html. Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to Dimensional Fund Advisors LP. See “Index Descriptions” below for descriptions of Fama/French index data.
Despite the clear long-term value premium, over shorter periods of time realized premiums can be volatile as we see above. This may lead investors to wonder if there is a way to predict when the scripts will flip based on past realized premiums. As shown in Exhibit 2, historical data suggests that there isn’t a reliable way to predict whether a realized premium for value or growth in a given year will lead to one or the other in subsequent years.
|Exhibit 2: Annual Value Premium and Following Year Value Premium|
US Market, 1927-2022
In USD. Past performance is no guarantee of future results. Actual returns may be lower. Annual value premium is the return difference between the Fama/French US Value Research Index and the Fama/French US Growth Research Index. The Fama/French Indices represent academic concepts that may be used in portfolio construction and are not available for direct investment or for use as a benchmark. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Source: CRSP and Compustat data calculated by Dimensional. Fama/French data provided by Fama/French. Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund Advisors LP. See "Index Descriptions" below for descriptions of Fama/French index data.
The theoretical support for value investing is longstanding—paying a lower price means a higher expected return. The theory is further backed by long-term data supporting the existence of a value premium. Disappointing periods are sure to emerge from time to time, but the principle that lower relative prices lead to higher expected returns remains the same.
While we don’t believe there is a reliable way to predict when realized premiums will occur, we do expect a positive value premium every day. Moreover, as realized premiums do tend to be volatile in the short term, when they do show up, they tend to do so quickly and in large magnitude. For this reason, we believe it is essential to stay disciplined and avoid trying to time the markets in order to effectively capture the value premium.