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Financial Industry Insights from Advisors Asset Management
On January 08, 2019
Growth or Value? The Case for a Shift to Value
It is understood by many that the market discounts future events. However, discounting negative future events is done to such an extreme level that opportunities become so glaring that they are missed by the masses from the flood of negative expectations. The negative feedback loop is far more powerful than the positive feedback loop due to our predisposition to negativity bias. It is more pronounced now due to proliferation of information. The combination of a negativity bias, the multiple effectiveness of despair headlines, and the ultimate herd mentality in which investors believe the market or others have more knowledge than they do has created a potential cyclical opportunity not seen in over a decade.
For those who have been value-based investors, it has been a struggle relative to growth investing. Standard & Poor's breaks its index into two classifications: growth and value. When we monitor outperformance, we notice some long-term trends that give us clues about where to place emphasis going forward. The chart below shows the S&P growth index divided by the S&P value index since 1995 broken into three discernible periods.
Past performance is not indicative of future results.
The value component has averaged a 6.87% annualized total return since June 1995 while the growth component has averaged an 8.40% annualized return. Yet when we break it down into long-term cycles, we see extreme outperformance in one category over the other. We believe it is best to “zig” when the majority says, “Zag is the only way and zig has died.”
In discerning value-based investments, look at some of the categories’ following characteristics:
We see value in places that are not based solely on price levels. The elongated economic and market cycle has revealed a few things:
Q2 2018
Q3 2018
% change
Total Value bought back
$219.09 billion
$237.6 billion
8.44%
Total Shares bought back
3,187 m shares
3,703 m shares
16.2%
Average Price bought back
$68.72
$64.15
-6.65%
Source: AAM, Insider Score data
Initial estimates for the 4th quarter are the average price paid for stock buybacks is coming in at $46.25 per share, or a 28% decline. If there is an 8.4% increase surge in value on a decline of 6.65% in price, what might happen in the buyback if the average price is down 28%?
What we see is the market has given us an opportunity for those with longer term horizons than that those of the high frequency trading group. It may not play out immediately, but the long-term opportunity in value-based equities with a focus on dividends and solid balance sheets may be timely.
CRN: 2019-0107-7139R
This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.
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