Historical Data Suggests Value Strategies Set Up for Big Time Comeback

John Alberg and Michael Seckler of Euclidean Technologies Management write in Advisor Perspectives that “now is a very attractive time to invest in value strategies.” They note the extensive evidence that a value approach based on price-to-earnings ratios would have been profitable long term, adding that their research suggests it is particularly true “for companies that also have a combination of consistent operations, good returns on capital and balance-sheet strength.” Noting that growth investing has outperformed value investing recently, they examine historical data to address the question, “If you have not been participating in the market’s recent gains, should you pivot your investments based on what has recently worked in the markets?” They reach a firm answer of “no,” based largely on an assessment of past market cycles. They note that although value yields superior returns long term, in six distinct periods since World War II “growth outperformed value on a trailing five-year compounded return basis,” and maintain that “we are currently in one of these periods.”

Their case for value investment strategies today is based on data that after each period in which growth outperformed, “value subsequently delivered very strong results over the next 5+ years” and that “strong absolute returns have been realized in each value recovery.” Further, they claim that “in the current cycle, the value rebound has not yet occurred.” See the chart below demonstrating the outperformance of value after periods of underperformance.

Quoting Steve Jobs’ statement that much of successful entrepreneurship depends on “pure perseverance,” Alberg and Seckler analogize to value investing: “the superior long-term returns offered by value strategies would have accrued only to investors with the conviction to persevere across difficult periods,” and suggest the current market is such a period.