It’s been a Sisyphean task promoting a global equity style of investing over the past several years. When one sits down and examines the performance history for the MSCI World Value Index vs. the MSCI World Growth Index, it becomes apparent that the current underperformance streak is notable in several respects. Fortunately, streaks have tended to revert over time and the rebounds have tended to offset, or more than offset, the prior underperformance periods. Looking at the numbers for the two indices since inception in 1974 reveals some interesting dynamics in the continual tug of war between global growth and value investors.
Before we begin examining the numbers, let’s use MSCI’s own words to define the methodology behind choosing value and growth stocks for these indices:
MSCI Global Value & Growth Indices categorize value and growth securities using clear and consistent sets of attributes and a rigorous methodological framework. Style characteristics are defined using eight historical and forward looking variables (three for value and five for growth).
Each security in an underlying MSCI index is given an overall style characteristic derived from its value and growth scores and is then placed into either a value or a growth index (or is partially allocated to both). Ultimately, the adjusted market capitalization of each constituent of the underlying index is fully represented in the combination of the value index and the growth index, with no "double counting".
Msci.com
Here are the yearly performance numbers for the MSCI World Growth and Value Indices:
Using simple returns (dividends excluded), the MSCI World Value Index has outperformed the Growth Index over the past 38 years by nearly 0.90% per annum: 8.19% per year versus 7.30%. The annualized numbers, however, mask a “lumpiness” and “streakiness” to returns that is surprising to many investors. Over the 38 year time frame, Growth has actually outperformed Value in 20 of the years. The average differential is 0.63% per year, but the median differential is -0.17% indicating Value outperformance tends to be skewed to the big upside performance differentials. The biggest year of outperformance for the MSCI World Value Index was 2000. The differential was +24.82%. This followed on the heels of a massive underperformance streak for value, which we’ll address further below. The biggest negative year for Value relative to Growth occurred in 1998; Value underperformed by 18.5%. Calculating the standard deviation for the yearly differentials gives us another frame of reference for “lumpiness.” At 7.99%, very high relative to the average differential of 0.63%, we see that performance in individual years tends to be very wide.
Under and outperformance tends to be streaky. The current yearly streak of Value underperformance exceeds anything ever observed in the history of the data series, though. Value has underperformed Growth for the past six years, 2007 through 2012. Prior to the current period, the longest yearly streak of underperformance stood at three years. During the current streak (through the end of 2012), cumulative performance for the Value Index stands at -21.63% vs. +3.21% for the Growth Index, a cumulative deficit of 24.84%. This represents the second largest cumulative deficit. The biggest deficit belongs to the years surrounding the tech/equity bubble in the late 1990s when growth stocks went on a massive performance rip to the upside. Though growth “only” outperformed value for three years (1997 through 1999), the cumulative outperformance for growth totaled 50.81% over those three years, dwarfing the cumulative deficit witnessed during the current streak. Needless to say, the late 1990s represented a big-time period of frustration for those in the value space. It was very hard for value investors to stick to their guns.
What’s the good news for Value investors, especially those frustrated with the current period of underperformance? Streaks of underperformance have been followed by streaks of outperformance. And, in every case since the inception of the indices that the Value Index has underperformed the Growth Index for two or more years consecutively, the subsequent outperformance streak has produced cumulative excess returns that offset the losses felt during the prior underperformance period. For instance, as mentioned, during the three years of the late 90s bull run, the MSCI World Value Index rose 48.79% vs. 99.59% for the World Growth Index, a deficit of 50.81%. Over the next seven years, 2000 through year-end 2006, Value rose 33.56% vs. -20.44% for the Growth Index, a cumulative performance differential of 53.99%. Compound out the yearly performance over those ten years and Value handily outperformed Growth from year-end 1996 to year-end 2006, 98.71% vs. 58.80% for Growth. While the value investor experienced significant frustration, the investor was ultimately vindicated. This type of “through the cycle” outperformance has occurred in every case since 1974. The lesson: no matter how infuriating the underperformance streaks for value, it pays to stick with the strategy.
So far this year, the MSCI World Value Index is outperforming the Growth Index by 0.63%. There’s a long way to go for global value to erase the recent deficit. If history is a guide though, value investing’s time in the sun may be approaching. We’ll leave you with a chart showing the ratio of the MSCI World Value Index price to the MSCI World Growth Index showing just has much relative performance has oscillated over the past 16 or so years.
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| IronHorse Capital |
