Value Sneaks Past Growth

Even a vast shift can be hard to see. A sea change or metamorphosis starts slowly and then takes hold. By the time the change takes place, you can almost have missed it. Such a stealth transition is taking hold in investing styles, where value is finally beating growth over the past few years basis—after a long dry spell of underperformance. As a value investor, I welcome this change, but I’ll admit that it’s still hard to discern.

On a three-year basis, large-cap value has returned 12.66% versus 7.17% for large-cap growth. This would surprise most market watchers, given that growth outperformed in both 2021 and, to date, this year. But 2022 made the difference: growth got clobbered. It’s tempting to say that, since value has outperformed only one of the past three calendar years, growth is still in the lead. But, statistically, three-year periods are the minimum time range that should be used for performance comparisons. After all, a calendar year is just an artifact—and a relatively small one at that. Three-year periods offer a more accurate window into investor psychology. And the three-year differential here cannot be denied.

The divide is even wider in the small-cap sector, where small stocks have returned 16.82% on a three-year basis versus 4.8% for their growth cousins. This level of outperformance is surprising given that so much media attention has been paid to tech’s return to prominence. As many commentators have pointed out, seven large tech stocks have dominated the resurgence, which explains why small-cap growth has languished.

Historically, once value stocks take the lead, this outperformance stretches on for several years. Even in the wake of recent gains, value stocks still appear extremely cheap compared to growth. This bodes well for their continued expected returns.

As the media continues to focus on AI, meme stocks, and the seven tech leaders, the tale of value’s return will easily be obscured. But for those who recognize the shift that’s taking place, it shouldn’t be ignored.

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