kovitz insights finding the value in value investing · kovitz insights june 2020 finding the value...

THE PERFORMANCE DERBY

We certainly agree with the argument that it is better to be invested in some broadly diversified portfolio than none at all, but it is hard to ignore the long-term outperformance of Value stocks. A Value investor starting with $100 on June 30, 1926, would have nearly $9 million at the end of April 2020, while a Growth investor who began with the same amount would have roughly half of $1 million.

KOVITZ INSIGHTS

JUNE 2020

Finding the Value in Value Investing

KOV I T Z.CO M

Despite having a big lead over their Growth counterparts since the Tech Bubble in 2000, Value stocks have not performed as well recently, whether measured by the pure factor indexes (a stock can be in Growth or Value, but not both at the same time) or by the conventional factor indexes (a stock can be in Growth and Value, with the weighting determined by the index provider).

As of 04.30.20. Source: Kovitz using data from Bloomberg Finance, L.P.

Broad Market Index Returns

Index 1 Year 3 Year 5 Year 7 Year 10 Year 15 Year 20 Year

Russell 3000 Total Return Growth Index 9.5% 51.6% 82.3% 156.4% 273.8% 359.7% 165.4%

Russell 3000 Total Return Index -1.0% 26.1% 49.2% 103.2% 191.5% 242.5% 206.4%

Russell 3000 Total Return Value Index -11.9% 2.8% 19.8% 57.6% 122.2% 147.7% 226.3%

S&P 500 Growth Total Return Index 7.4% 47.8% 79.1% 152.1% 269.6% 334.3% 193.3%

S&P 500 Total Return Index 0.9% 29.7% 54.7% 110.5% 202.2% 244.1% 196.4%

S&P 500 Value Total Return Index -6.7% 11.0% 29.2% 69.5% 138.6% 161.6% 183.8%

S&P 500 Pure Growth Total Return Index -0.7% 31.8% 50.0% 121.4% 246.3% 353.4% 243.7%

S&P 500 Pure Value Total Return Index -28.8% -15.8% -5.9% 37.9% 107.0% 162.7% 393.9%

John BuckinghamPRINCIPAL

PORTFOLIO MANAGER

Jason R. Clark, CFAPRINCIPAL

PORTFOLIO MANAGER

Christopher QuigleySENIOR RESEARCH

ANALYST

KOVITZ | FINDING THE VALUE IN VALUE INVESTING | JUNE 2020

VALUE STOCKS HAVE HAD THEIR DAY IN THE SUN

The performance difference between Value stocks and Growth stocks for any rolling ten-year period has never been as wide as it was on March 31st, with the chart below showing that Value underperformance has been a rare phenomenon over the last century. Yet, we think the chart is still a little misleading.

VALUE AND GROWTH EQUALLY WEIGHTED

Most widely published stock market indexes are constructed using the market capitalization (price x number of shares outstanding) of each constituent company to determine their percent weight in the index. For example, Facebook represented approximately 2.0% of the S&P 500 Index and Amazon represented approximately 4.3% of the S&P 500 Index at the end of April. For an index of 500 stocks, these are very large weights. As such, the performance of a few stocks can significantly influence the performance of the overall index. In fact, just ten stocks comprise a quarter of the index, while just 40 stocks make up half of it.

Fortunately, the good Professors Eugene F. Fama and Kenneth R. French crunch their equity market performance numbers on equally weighted portfolios, in addition to capitalization-weighted portfolios. We consider the equally weighted series to be representative of average Value and average Growth stock returns, versus a series that is heavily dependent on the largest companies in each group. The equally weighted Value and Growth chart shows that we have encountered the first period of sustained Growth outperformance, while the absolute performance difference is much smaller.


VALUE STOCKS COMING OUT OF RECESSIONS

While the gap in the performance derby is historically unusual and strongly favors Value stocks, the category’s performance coming out of recessions has been stellar. Certainly, there are no guarantees that history will repeat, but if would seem almost certain that overall U.S. GDP growth will be trending higher, albeit from a very low base, as we move into the second half of the year and we like how Value stocks, like those that we have long championed, have performed in such an environment. That is not to ignore the naysayers who suggest that the rebound in equities since the March 23 lows has been overdone, but the average stock is still down significantly on the year, with sectors like Energy, Financials and Industrials off more than 20% as of this writing.

Source: Kovitz using data from Bloomberg Finance, L.P., Professors Eugene F. Fama & Kenneth R. French, and the National Bureau of Eocnomic Research.

S&P 500 and Fama/French Value Performance

RecessionTrough Date

1 Year Post S&P 500 TR

1 Year Post FF Value TR

1 Year Post FF Growth TR







March 1933 81.5% 88.7% 82.9% 155.7% 135.3% 169.1% 62.4% 69.5% 96.2%

June 1938 -1.7% -14.5% 2.7% 0.8% 4.6% 14.5% 43.9% 129.3% 65.5%

October 1945 -7.2% -2.2% -6.8% 14.7% 26.6% -1.3% 64.8% 76.2% 38.5%

October 1949 35.1% 43.8% 29.9% 92.8% 96.5% 66.3% 177.8% 174.6% 131.2%

May 1954 36.1% 60.2% 34.4% 83.7% 95.5% 69..4% 145.2% 200.3% 143.0%

April 1958 37.2% 61.0% 51.4% 66.4% 94.4% 86.4% 89.9% 128.4% 84.1%

February 1961 13.6% 16.9% 8.6% 35.2% 49.1% 12.1% 68.4% 137.0% 55.6%

November 1970 11.2% 11.0% 20.5% 20.6% 13.5% -0.7% 25.1% 44.4% 1.5%

March 1975 28.3% 51.5% 31.3% 22.1% 98.6% 44.4% 55.6% 157.8% 96.9%

July 1980 13.0% 22.9% 22.8% 56.1% 113.6% 69.7% 100.5% 207.7% 75.2%

November 1982 25.6% 39.8% 21.1% 66.8% 99.7% 36.4% 103.0% 123.9% 38.2%

March 1991 11.0% 25.5% 16.7% 29.8% 73.2% 25.8% 98.0% 154.7% 82.9%

November 2001 -16.5% -11.9% -18.5% 8.4% 39.8% 13.7% 34.3% 93.7% 33.5%

June 2009 14.4% 25.5% 14.7% 57.7% 53.2% 62.3% 136.9% 158.2% 140.8%

Averages 20.1% 29.9% 22.3% 50.8% 71.0% 47.7% 86.1% 132.6% 77.4%

THE ROAD AHEAD

While we are entrenched in an economic recession as a result of the Coronavirus pandemic, the Federal Reserve has been actively shoring up the stock and bond markets and lawmakers in Washington D.C. have been quickly rolling out record-setting stimulus packages to keep individuals and businesses afloat. We were reminded again in the first part of this year that anything can happen in the world and the equity markets often react sharply to geopolitical events, conflicts and pandemics. Yet despite the ever-present uncertainty of the future, we believe that the empirical evidence continues to support our long-term, multi-factor approach to Value investing.

U.S RECESSION TROUGH (PER NBER) AND EQUITY RETURNS


DISCLOSURES

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Russell 3000 Growth Index measures the per formance of those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth values.

Russell 3000 Value Index measures the per formance of those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth values.

The Russell 3000 Index is composed of 3000 large U.S. companies, as determined by market capitalization. This por tfolio of Securities represents approximately 98% of the investable U.S. equity market. The Russell 3000 Index is comprised of stocks within the Russell 1000 and the Russell 2000 Indices. The index was developed with a base value of 140.00 as of December 31, 1986.

The S&P 500 Growth Index is a market capitalization weighted index. All the stocks in the underlying parent index are allocated into value or growth. Stocks that do not have pure value or pure growth characteristics have their market caps distributed between the value & growth indices. Prior to 12/19/2005 this index represented the S&P 500/Barra Growth Index

The S&P 500 Value Index is a market capitalization weighted index. All the stocks in the underlying parent index are allocated into value or growth. Stocks that do not have pure value or pure growth characteristics have their market caps distributed between the value & growth indices. Prior to 12/19/2005 this index represented the S&P 500/Barra Value Index

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of in-vestment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

S&P Pure Growth Indices includes only those components of the parent index that exhibit strong growth characteristics, and weights them by growth score.

The S&P 500® Pure Value index is a style-concentrated index designed to track the per formance of stocks that exhibit the strongest value characteristics by using a style-attractiveness-weighting scheme.

The factor-based (book value-to-price) por tfolio data is from Eugene F. Fama and Kenneth R. French. The dataset is broken into four groups: large value, large growth, small value and small growth. A large value stock is a type of large-cap stock investment where the intrinsic value of the company’s stock is greater than the stock’s market value. A large growth stock is a growth stock of a company with a market capitalization value of more than $5 bil l ion. A small value stock is a value stock of a company with a relatively small market capitalization. A small growth stock is a growth stock of a company with a relatively small market capitalization. We blend the small and large company components equally on a monthly basis to form the broader Value and Growth series. 20-5-013

THE KOVITZ DIFFERENCE

We do not seek to predict the markets. We assess a company’s or asset’s intrinsic value compared to the market price and invest accordingly. We believe a long-term view is essential to successful investing. Our approach allows us to base our decisions on a business’ expected value multiple years in the future rather than volatile next-quarter expectations.

We are a premier Wealth Management firm with offices in Chicago, Illinois, Orange County, California and Madison, Wis-consin. Our Financial Advisors, Planners and Investment Professionals treat financial planning and wealth management as active processes, working with our clients to identify and implement the decisions that suit their needs. We focus on long-term investment solutions, backed by our own stringent research. To get in contact with a Kovitz financial professional email [email protected].

kovitz insights finding the value in value investing · kovitz insights june 2020 finding the value...

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