Style Drivers
Conclusion: Our style drivers have been favoring Value over Growth for some time now. Since the end of 2016, Growth stocks have dramatically outperformed Value. This relative performance divergence has occurred despite relative earnings growth favoring Value. The significant drop in Treasury yields from the Coronavirus outbreak coupled with plummeting oil prices have had a larger negative impact on Value versus Growth stocks. While admittedly visibility is currently very low, we do not believe the extent of the underperformance is justified when looking through a lens that extends beyond 2020. We expect that the combination of a peaking in the Coronavirus outbreak and expected additional monetary and fiscal stimulus will provide a backstop for stocks, especially those that have significantly underperformed.
Style Cycle Duration & Return
- Growth and Value style indexes have historically gone through extended cycles of relative outperformance and underperformance, typically lasting about seven years. Currently, the Russell 1000® Growth Index has outperformed Value for over 11 years, making it the longest cycle for either the Growth or Value Index. Historically, style leadership changes have typically occurred near the end of an economic cycle as can be seen in the chart below.
- Historical studies demonstrate that the Value style has outperformed the Growth style over long-term periods — domestic or international, large cap or small (Fama and French, et al.). With that historical perspective in mind, and after a long period of Growth outperformance, we believe that a shift toward Value may benefit long-term investors.
Sources: Frank Russell Company, Bloomberg
Relative Valuation
Comparative valuation is difficult, as Value sectors and stocks tend toward valuation measures that differ from Growth sectors and stocks. Price/Book Value is generally accepted as a key measure for determining whether a stock is considered Value or Growth, though due to accounting rules and other factors Book Value is becoming a less reliable measure. In recognition of this we have incorporated other valuation measures. Over the course of the last year, this signal consistently marched further toward Value, mainly as Growth stock valuations have expanded.
*Ranked 1 through 5, where low numbers indicating Value historically cheap relative to Growth and high numbers indicating Growth historically cheap relative to Value.
Sources: Frank Russell Company, Bloomberg
Relative Fundamentals
- Generally, relative price performance follows relative earnings. It is difficult to compare earnings between the Growth and Value indexes as the Value Index is more cyclical while the Growth Index is more stable. Yet as can be seen in the chart below, growth stocks have dramatically outperformed value, yet underlying earnings have not kept pace. Since the market bottom, the Growth Index has returned over 300%, while underlying earnings are up less than 200%. Comparatively, the Value Index is up approximately 200%, which is in line with underlying earnings growth.
- Analysts have yet to adjust earnings estimates to account for slowing economic growth, lower interest rates and lower oil prices. We anticipate that these negative adjustments will be more meaningful in the near-term for the Value Index.
- Another consideration for longer-term horizons is dividends. Dividend reinvestment has been a key driver to historical outperformance of the Value style over Growth. Currently, the Russell 1000® Value Index has a dividend yield that is nearly double that of the Russell 1000® Growth Index.
Sources: Frank Russell Company, Bloomberg
*Normalization adjusts or rescales the values of different time series to a notionally common scale to allow for comparability.
Value Poised to Do Better?
Another way to look at the Growth versus Value story comes from The London Company. Looking at relative returns on a rolling 10-year basis, one can see that the performance of both the Small- and Large-Cap Growth Indexes is two standard deviations ahead of their respective Value Indexes. The last time we saw this was at the tail end of the Dot-Com boom.
Source: Frank Russell Company
Glossary of Investment Terms and Index Definitions
This commentary is for informational purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security. There is no guarantee that the information is complete or timely. Past performance is no guarantee of future results. Investing in an index is not possible. Investing involves risk, including the possible loss of principal and fluctuation of value. Please visit touchstoneinvestments.com for performance information current to the most recent month-end.
Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial advisor or download and/or request one on the resources section or call Touchstone at 800-638-8194. Please read the prospectus and/or summary prospectus carefully before investing.
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