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Value Still Isn’t Dead
Value Still Isn’t Dead
As the long-running Value vs. Growth debate continues, we’d like to add our thoughts with a few points for investors to consider.
On the Great Lakes Fundamental Equity Team we’re bottom-up investors –we don’t try to time factors such as Value, but valuation is key to how we invest. That said, we agree with the consensus that Value as a style is extremely cheap, undervalued, and out of favor, and our own research supports that view (see below). We see these extremes play out every day when we analyze and evaluate companies, and understand their implied growth rates and profitability. As such, we feel Value is poised to outperform –the only question is when.
- Value is historically cheap vs. Growth. As you’ve seen, really for the last 10 years Value has lagged, and this gap has only grown wider. The consensus is that Value investing itself isn’t dead –it still makes sense to invest in stocks that have a valuation gap, and for which there’s an expectation that the gap will close. Style almost always reverts to the mean, and Value reverting to the mean in our opinion is long overdue and represents a meaningful investing opportunity.
- Value historically offers attractive risk-adjusted return. Standard deviation for Growth tends to be higher than that of Value, and as a result the Sharpe Ratio for the Russell 1000 Value Index tends to be higher over long periods. However, standard deviation for both Growth and Value are comparable over the recent 5 years, making Sharpe Ratios for Growth more attractive. But historical data does not support the persistency of this recent trend.
- In a market inflection period there is an opportunity for Value to break out. This happened in 1999-2000 as the tech names rolled off and names with more traditional valuation stepped up.
- The tech names that dominate the index now are more mature than in 1999-2000. Still, is it reasonable to assume that the FAANG stocks will hold their leadership into the indefinite future? Hard to say, but we believe this is probably not the case. Leadership rolls over and changes over time, and those periods present an opportunity for Value to step up, and for active management to prove its worth.
- Another reason Value has lagged Growth is because Value has a much higher weighting in Financials and Energy, and both have had a very tough time lately. Financial firms have had to navigate a years-long low interest rate environment, combined with policy efforts to battle the economic impact of COVID-19. Energy firms have seen a drastic drop in demand coupled with an OPEC vs. Russia price war. Both sectors have already seen promising improvement, and are poised to benefit from post-COVID recovery.
- The Great Lakes Advisors Fundamental Equity investment process is based on time-tested principles of valuation, and that process puts us in good position for when Value outperforms, as we feel it ultimately will.
Great Lakes Advisors, LLC (“Great Lakes” or “GLA”) is an investment advisor registered with the Securities and Exchange Commission under the Investment Advisors Act of 1940. Established in 1981, Great Lakes is a subsidiary of Wintrust Financial Corporation and a part of the Wintrust Wealth Management family of companies. On October 1, 2013, majority owned subsidiary Advanced Investment Partners, LLC (“AIP”) became fully-owned and integrated into Great Lakes. Great Lakes is a distinct business unit with distinct investment processes and procedures relating to the management and/or trading of investment portfolios for its clients.
Great Lakes Advisors, LLC claims compliance with the Global Investment Performance Standards (GIPS® ). A complete list of firm composites and performance results, and the policies for valuing portfolios, calculating performance, and preparing GIPS compliant presentations are available upon request. Great Lakes Advisors, LLC’s fees are available upon request and may be found in our Form ADV Part 2A. Performance data quoted herein represents past performance. Past performance does not guarantee or indicate future results. Returns and net asset value will fluctuate.
Manager commentary represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. To determine if this strategy is appropriate for you, carefully consider the investment objectives, risk factors, and expenses before investing. The holdings, industry sectors, and asset allocation are presented to illustrate examples of the securities bought and the diversity of areas in which we may invest, and may not be representative of current or future investments. Portfolio holdings subject to change and should not be considered investment advice. The specific securities identified and described do not represent all of the securities purchased, sold or recommended for advisory clients and it should not be assumed that investments in the securities identified and discussed were or will be profitable. To obtain a list of all securities recommended during the past year, contact Great Lakes Advisors (GLA) at 312.553.3700. Actual clients’ portfolios may or may not hold the same securities depending on the guidelines, restrictions and other factors of the specific portfolios.
The Russell 1000 Growth Index measures large mid-sized capitalization companies in the United States equities market that also exhibit a growth probability. The index is a composite of roughly 1,000 securities issued by the largest companies in the U.S. in terms of market capitalization. The Russell 1000 Growth Index is a subset of the securities found in the Russell 1000 Index. The Russell 1000 Growth is published and maintained by FTSE Russell.
The Russell 1000 Value Index is the large-cap value segment of the Russell 1000, consisting of the 1,000 largest companies within the Russell 3000 index. Frank Russell Company reports its indices as one-month total returns.
The index performance figures are calculated in U.S. dollars and reported on a gross basis. The index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income. Fees, including but not limited to the advisory fee, transaction and custody charges, would reduce the return. Investors cannot invest directly in an index. These indexes are not managed or sold by Great Lakes Advisors. Past performance is not indicative of future results. 20-6-0096.
