December 5, 2019 | By: Mark Stacey, Grant Wang and Bill DeRoche

Factor in the Past

2.5 min read

Why value’s underperformance is reminiscent of the 1990s.


Cheap has not been cheerful for investors in recent years. Value investing, the style made famous by Warren Buffett, has regularly underperformed other time-tested factors and has been the weak link in many portfolios. But this has happened before and now may be the time to start thinking more positively about the prospects for inexpensive stocks.   

If anything, value’s underperformance is most reminiscent of the late 1990s when the market cycle was also growing long in the tooth and eventually gave way to the boom and bust.

Back then, U.S. value stocks underperformed U.S. growth stocks for most of the 1990s, netting significantly smaller gains in a climate of outsized gains. On a cumulative basis over the decade, growth stocks almost doubled value stocks.  But in the early 2000s, when stock prices collapsed, value was the factor that stood up better, falling far less than growth did during the downturn and gaining more once markets bottomed and began to rally again.

In part, this can be attributed to how individual sectors of the U.S. market performed both before the tech bubble burst and after it. Information technology (IT), which is synonymous with growth, was the top-performing sector throughout the ‘90s, followed by financials, health care, consumer discretionary, and industrials, while the more value-oriented sectors—including energy and materials stocks—were at the bottom. But once the bubble burst, sector leadership was turned on its head, with value and defensives outperforming and IT stocks leading the laggards. 


Sector Performance: 1990s vs 2010s

Source: Bloomberg LP. As of November 15th, 2019.

That’s also what has transpired during the current market cycle, with IT outpacing all other sectors over the past 10 years. And the parallels to the ‘90s don’t end there: low unemployment, slower growth and rate cuts were all part of the macro landscape in the late ‘90s – just as they are today. So too was the spectacle of a U.S. Presidential impeachment.

None of this guarantees that investors will see a market repeat of the early 2000s. However, investors are already kicking the tires on value again. The factor has outperformed in varying regions and sectors around the world at times in 2019. And while it can’t be said for sure if value will continue to outperform, history can be a compelling guide and factors like it tend to remain out of favour for only so long.

Still, investors need to be careful about chasing one winning factor at the expense of all others. By choosing a multi-factor approach, they improve the chance of achieving better risk-adjusted returns over time.

Mark Stacey is Co-CIO AGFiQ Quantitative Investing, Head of Portfolio Management

Grant Wang is Co-CIO AGFiQ Quantitative Investing, Head of Research

Bill DeRoche is Chief Investment Officer, AGF Investments LLC, Head of AGFiQ Alternative Strategies

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The commentaries contained herein are provided as a general source of information based on information available as of November 30, 2019 and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.

The views expressed in this outlook are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

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