Summary
- This may be the best period in many years to own Value ETFs, mutual funds, or sector funds.
- There is much evidence that Value funds tend to excel when inflation is high as well as interest rates.
- At the latter part of the economic cycle or in recession, the overall market tends not to do so well; Technology and Consumer Discretionary stocks often fade.
- Value stocks, with relatively large positions in defensive stocks, tend to outperform the overall market.
- There is perhaps no better time to be a Value stock investor than now and in the years to come.
In spite of the sometimes big moves in the stock market on a day-to-day basis, outperformance or underperformance of overall categories of stocks can take months or even years to become apparent.
In my article on Seeking Alpha a little more than five years ago, and in my Newsletter as well, I have emphasized the importance of investing in Value stocks. The reasons for recommending holding Value funds at this late stage of an extended economic expansion were spelled out there. As I do not analyze individual stocks, I prefer to get overall exposure to a fund category such as Value through ETFs and mutual funds.
But for the following more than 3 1/2 years (April 2018 through Dec. 2021) after writing the above article, the Value category, as measured by Vanguard index ETFs that closely track category performance, namely Vanguard Value ETF (VTV
Ouch! These non-annualized returns can be seen as highly discouraging to anyone who put a large amount in Value at the expense of either Large Growth or Large Blend categories. While not at all losing money, the Value category did not perform as well as expected vis-a-vis my expectations. This reiterates the importance of not placing most of one’s bets on a single category, or, in other words, remaining well diversified.
But, as the expansion favoring Growth stocks became even more long in the tooth, remaining invested in Value finally started to pay off beginning in Jan. 2022 and I expect will continue to do so in the remainder of this year or even in the years ahead. Once 2022 began, things finally started to turn more advantageous for Value fund holders.
Really, you might ask? If we now look at the performance of VTV from Jan. 1 2022 through April 21, 2023, a bear market period for stocks in general, it lost about 4% in total. But VUG lost over 22% while VOO lost almost 13%. So, comparatively speaking, Value was finally a superior place to be. But less negative returns are scant consolation for many. What investors are really hoping for is positive, overall market beating returns. Shortly, I will show why I think that is about to happen.
What Some Others Have Said or Are Now Saying
According to a 2022 article on bankrate.com:
“Growth stocks may do better when interest rates are low and expected to stay low, but many investors shift to value stocks as rates rise.
This fact may be found repeatedly when examining articles as to when is a better time to be in Value stocks. And certainly, 2022 and 2023, so far, were perfect examples of this typical result. As inflation continued to soar, the Fed raised rates repeatedly. Thus, Growth and even broader stocks dived seriously while Value stocks took only a minor hit.
But at present, inflation remains high, while more Fed attempts to control it are highly likely. That is one reason why fund manager John D. Linehan of three T. Rowe Price funds, states:
“it is worth reiterating my view that the current investment climate for value stocks is as favorable now as at any time since the GFC [Global Financial Crisis 2007 – 2008]
Fidelity Investments believes that we are very late in an expansionary cycle with the likelihood of a recession emerging this year. The site goes on to state:
“The onset of recession typically implies a challenging time for riskier assets and outperformance of more defensive categories.”
These more defensive outperforming categories, based on data from previous economic cycles, would include consumer staples, energy, and utilities, and, if and when a recession actually hits, health care, consumer staples, and utilities. The most underperforming categories at this late cycle stage are likely to be technology and consumer discretionary.
Why I Believe Value Funds Are Now the Place to Be
Granted that VTV has still stagnated this year with a return of only 0.56%. But not all Value funds have done badly. Vanguard Windsor (VWNDX
Given the above four defensive categories, it is useful to examine the current portfolio composition of both VTV and VOO, as they likely closely represent the composition of other Large Cap Value and Large Cap Blend funds.
VTV vs. VOO have the following approximate current sector representations, shown in darkened text:
- Consumer Staples 12% vs. 7%
- Energy 8% vs. 5%
- Utilities 6% vs. 3%
- Health 20% vs. 14%
- Technology 9% vs. 27%
- Consumer Discretionary 3% vs. 10%
In other words, VTV has 46% of its portfolio in outperforming (based on prior economic cycle data) categories while VOO has only 29%. On the other hand, VOO has 37% in underperforming categories vs. only 12% in VTV.
You can see that, based on previous economic cycle data, Value funds, as represented by the likes of VTV, are much better positioned at the present time and for a possible recession ahead than are likely other broad market funds. The figures are even more stark in considering Growth funds, such as VUG, where there might be as much as 60% or more in technology and consumer discretionary stocks and quite little in Value categories.
My Own Value Funds
While Vanguard Value ETF or its equivalent portfolio, Vanguard 500 Index Fund (VFIAX
I personally own the following Value funds:
- T. Rowe Price Equity Income Fund (PRFDX
- T. Rowe Price Value (TRVLX
- Vanguard Equity-Income Inv (VEIPX
- Vanguard Windsor™ II Fund Investor (VWNFX
- Vanguard Windsor™ Fund (VWNDX
- AMG Yacktman Fund (YACKX
- Invesco S&P 500 Pure Value ETF (RPV
- Vanguard Financials Index Fund (VFH
- Utilities Select Sector SPDR® Fund (XLU
- Vanguard Energy Fund (VGENX
- Tweedy, Browne International Value Fund (TBGVX
Since many of these funds are highly correlated, you may want to select only one or two for your own portfolio.
Photo by Alexander Popov on Unsplash