After a disappointing performance for the last five years, value stocks are beginning to shine.
Indeed, value-oriented mutual funds outperformed growth funds for the first time in five years during 2012, according to Lipper data cited by the Financial Times.
And the huge stock rally of the last four years — more than 100 percent — has market participants like Alec Young, global equity strategist at S&P Capital IQ, turning to value stocks for safety.
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Stocks with lower valuations protect investors better when the market corrects, he tells the Times.
At some point, stocks will stop moving together as one, putting a premium on stock-picking. That could be a boon for value stocks, because stocks with inexpensive valuations have outperformed over the long term.
Young likes the financial sector in particular, with the KBW Bank Index having jumped 25 percent over the last year.
Charles Brandes, chairman of the Brandes Investment Partners, tells the Times that value stocks’ performance during the past five years was an exception.
Because many investors had not experienced anything like the recent financial crisis, “investors were afraid to buy companies that had any problems whatsoever.”
In addition, he says, “stock picking was ignored by institutional investors in favor of indexing and that caused a big increase in correlations.”
Meanwhile, Gerry Fowler, global head of equity strategy at BNP Paribas, tells the Times it’s not value versus growth that’s driving equity markets, but “quality,” such as that evidenced by companies with strong balance sheets.
As for why value stocks outperform growth stocks over the long term, recent studies by Research Affiliates find that dividends may play a key role, according to Forbes.com contributor Rick Ferri.
The research shows that “value stock indexes experience higher dividend growth than growth indexes, and this contributed significantly to the value premium,” he writes.
“They found the process of replacing lower‐yielding value stocks (now growth stocks) with new higher-yielding growth stocks (now value stocks) increased the dividend growth of value indexes over growth indexes.”
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