Buy low, sell high. It’s a classic adage, and one that’s helped stock investors reap consistent gains for the better part of seven decades.
Having returned 5% on average each year from 1940 through 2007, the so-called value trade has lost 2% per year over the past decade, according to Goldman Sachs data. It’s down 10% this year alone, badly lagging an S&P 500 that’s climbed 8.7%.
The decline of the value strategy has mirrored the rise of passive investing and quantitative trading. Total assets in performance factor-based exchange-traded funds have quadrupled in the past five years, approaching $US600 billion earlier this year, while quants now manage more than $US1 trillion, says Goldman.
These methods are less sensitive to valuations than traditional active management. Rather than simply loading up on the cheapest stocks and cutting the cord on expensive ones, they’re more agnostic towards price, which has made it more difficult for the value strategy to function as it always has.
Another explanation offered by Goldman for the flagging value trade is that we’re in the late innings of the current economic cycle, a period normally characterised by subdued gains for the strategy. They argue that as investors have gotten increasingly worried about a stagnating economy, they have been hunting for growth, not value.
Further, the narrow distribution of stock valuations at the end of the last economic cycle “helped set the stage for the exceptionally poor returns to value during the subsequent decade,” says Goldman. That boosted the valuation of the strategy, capping its future upside.
So is this the end of the value trade as we know it? Goldman doesn’t think so, despite its recent struggles. After all, the value strategy is highly cyclical — it’s just been trapped in a particularly vicious part of that cycle for longer than usual.
“As long as humans make investment decisions, we believe value will continue to be a good long-term investment strategy,” a group of Goldman equity strategists led by Ben Snider wrote in a client note. “Though returns may be harder to capture in the future than they have been in the past.”