Even today, roughly 75% of “value investors” remain underweight value, as Equity Portfolio Manager Andrew Corry noted recently. Meanwhile, hedge fund value exposure appears “a net short” even after recent value surge, as Gordy Lawrence noted. And, according to Equity Portfolio Manager Nataliya Kofman, global managers remain historically exposed to US equities, with North America accounting for 71% of the MSCI World Index versus just over 50% a decade ago.
It is clear the value rebound has more room to run. Nonetheless, assuming a smooth transition neglects how entrenched the growth bias likely remains. There is an entire generation of market participants — both institutional and retail — that has never invested during a value regime. Market machinery has transformed since the global financial crisis (GFC), with factor-based strategies and retail investors having unprecedented influence over market outcomes. Unseating their growth bias will likely require consistent and overwhelming evidence of value’s primacy. And that’s unlikely to come given today’s turbulent economic environment.
Many value stocks have been neglected to extremes. Many growth companies have a clear path to validating lofty valuations. From sustainability to artificial intelligence and automation to supply-chain reshoring, there are powerful structural trends at play that could determine global winners and losers regardless of their factor classification.
Time and again over the past year, we have quoted Equity Portfolio Manager Mark Mandel: “It would make a lot of sense that the GFC ushered in one regime, and COVID ushered in the next.” A resumption of value’s leadership could be a multiyear trend resulting from that investment regime change. For the time being, however, we expect volatility, more than value dominance, to define markets. Doubling down on fundamentals is a path to exploiting price disconnects that result from that volatility.