Increased manager dispersion within the Value space highlights the division in the subsets of Value
It is undeniable that over the past decade Value equity has taken a back seat to Growth equity in the mind of investors (annualized returns of the Russell 1000 Growth versus the Russell 1000 Value for the ten years ended 9/30/20 were 18.84% vs 11.33%1). This divergence in returns, which really began in earnest in 2017, has only exacerbated over the past four years. This has clearly led us to thinking about the future relationship between Value and Growth, but more recently we have considered, within Value, what constitutes the landscape for managers of that discipline. While it is certainly typical to see dispersion amongst manager returns in the universe given the multitude of sub-strategies that make up the “Value” manager universe (i.e., Traditional Value, Relative Value, Deep Value, and Growth at a Reasonable Price (“GARP”) among others), what we have discovered is that the divergence of manager returns within the Value universe (as measured with the PSN Informa system) is over two standard deviations greater so far in 2020 (through 9/30) than the average dispersion over the past decade.
We dug a little deeper and discovered that the last time we saw universe divergence this great was 1999-2001, right through the Tech Bubble. Market extremes usually correlate with increased dispersion both at the stock and portfolio level. We believe that we’re experiencing similar conditions now in terms of market concentration (the top 5 names in the S&P 500 at 9/30 made up just under 23% of the total market cap of the entire benchmark, top 5 concentration didn’t even make it to 18% during the Tech Bubble2), preference for growth at any price, and divergence in individual sector returns as we did in markets twenty years ago. Sector and factor exposures have had outsized effect this year. If a portfolio was overexposed to Health Care (+20%YTD) and Materials (+12%YTD) or underexposed to Energy (-45%YTD) or Financials (-12%YTD) those would have greatly positively influenced performance on the year3. With the variations in strategies followed by managers within the Value universe, it is clear that “Value” is a big tent. Looking at this year when we have seen this great divergence, we found that GARP-style managers, as measured by the S&P GARP Index TR, returned -5.76% while the Russell 1000 Value was down -15.12% and Deep value, as measured by the Acquirers Deep Value Index was down -34.33%4. Subsets of Value will have varying risk and return profiles that could be useful to investors at different stages of the coming recovery. Market extremes and increased dispersions tend to drive even wider chasms between investment styles and this year, with everything that has changed for us all, has been no different.
We want to wish everyone a Happy, Safe and Healthy Thanksgiving!
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