Value stocks stink. At least, that’s what many investors think. Vanguard’s S&P 500 Index beat Vanguard’s Value Index over the past 3, 5, 10, 15 and 20 year periods ending August 31, 2016.
Over the past 20 years, Vanguard’s Value Index languished in the basement. Vanguard’s Mid-Cap Index, its Growth Index, its Small Cap Index and its Total Stock Market Index all kicked it down the stairs.
Growth of $10,000 20 Years Ending August 31, 2016
|Fund||Amount Invested||Investment Grew To:|
|Vanguard Small Cap Stock Market Index (NAESX)||$10,000||$57,816|
|Vanguard Mid Cap Stock Index (VIMSX)||$10,000||$52,873|
|Vanguard Growth Stock Index (VIGRX)||$10,000||$49,288|
|Vanguard Total Stock Market Index Fund (VTSMX)||$10,000||$48,928|
|Vanguard S&P 500 Index (VFINX)||$10,000||$47,522|
|Vanguard Value Stock Market Index (VIVAX)||$10,000||$46,479|
|Source: Morningstar.com, accessed September 1, 2016|
Small-cap value stocks have historically done well. But over the past 3, 5 and 10 year periods, they’ve also come up short.
Growth Of $10,000 Ending August 31, 2016
|Past 3 Years||Past 5 Years||Past 10 Years|
|U.S. Small Cap Value||$12,358||$17,538||$18,448|
|Source: Morningstar.com, equity categories|
Many value stock investors have long tossed in the towel. They’ve also behaved badly. They bought more after value stocks rose. They sold (or ceased to buy) when value stocks dropped. Over the 15-year period ending July 31, 2016, Vanguard’s Value Index Fund averaged a compound annual return of 6.43 percent per year. According to Morningstar, the average investor in that fund averaged an annual compound return of just 3.73 percent per year.
But smart investors shouldn’t bury value in the ground. In February of this year, I wrote that value stocks were cheap. Research Affiliates had examined 12 factor based fund categories. They included momentum stocks, low volatility stocks and stocks with high gross profitability. As investment styles, most had become quite expensive. But value stocks stood out. They practically had a label that screamed, “Massive Sale!”
According to Research Affiliates, PE ratios for value stocks had fallen 4.78 percent when compared to the overall market over the previous 10 years. At some point, value stocks will climb up from the grave.
It reminds me of the recent film, Batman versus Superman. In the end, the two join forces to kill a monster villain. Superman dies. His loved ones cry. They bury the cape crusader. But in the film’s final scene, the camera zooms in. The ground begins to shake before the credits start to roll.
The same thing could be happening to value stocks now.
I’m not trying to make a market timing call. Nobody can consistently do so. It’s best not to try. But every asset class will have its day or decade in the sun. That day often comes when the asset class looks dead.
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and The Global Expatriate's Guide to Investing: From Millionaire Teacher to Millionaire Expat.