Value Returns Could Improve, But Nobody Can Predict When

Given today’s environment of rising interest rates and increased volatility, the market appears to be at a “crossroads,” and the value investing strategy could be poised to make a comeback, writes Wall Street Journal columnist Jason Zweig. He warns, however, “you would be foolhardy to believe anyone who claims to be able to predict precisely when it will happen.”

Since 1962, value stocks have (on average) outperformed growth stocks by 6.1 percentage points during the 12 months after a bump in the 10-year Treasury yield—this according to Cesar Orosco, a quantitative analyst at investment firm AJO. But Andrew Ang, head of factor-based strategies at BlackRock, argues that, on the whole, “there is little relationship between interest-rate movements and value premium, adding that, “value performs best during economic recovery from the worst periods of recessions.”

Marlena Lee, co-head of research at Dimensional Fund Advisors in Austin, Texas, says her firm has not found any reliable ways to predict when value might break out of it’s long slump, adding, “You can look back and assign some sort of story for each historical period when that happened, but then you need a new story for the next period.” Cliff Asness of AQR Capital Management echoes the argument,  Zweig writes, and describes the returns to value investing as “fairly random and unconnected to other things.”

Ultimately, Zweig concludes, the patient value investor should eventually be able to capture alpha, but adds, “What you shouldn’t do is believe anyone who claims to be able to predict exactly when value investing is about to pay off.”