By Catherine Yoshimoto, Director, Product Management
We’ve written extensively of late on the apparent rotation in performance from growth stocks to value stocks, and how investors might surf this wave. Until recently global growth stocks have had a good run relative to value stocks, outperforming by 7.6% on an annualized basis over the 10 years ending September 30, 2020. But the trend reversed in Q4 2020, and global value stocks have since outpaced growth stocks considerably. The about-face has many investors wondering whether the style rotation is here to stay—and if so, what to consider when it comes to their portfolios.
A long-awaited rotation
As shown below, the aftermath of the Global Financial Crisis (GFC) spurred an extended period of growth outperformance, which became further pronounced at the onset of the pandemic crisis.
However, November 2020 marked a turning point for this trend, as the emergence of COVID-19 vaccines sparked hopes that a global economic recovery could soon be underway. As shown below, the prospect of a reopening economy paired with rising inflation expectations fueled a rotation for global growth stocks.
The sectors behind the surge
With market expectations of a reflating economy on the horizon, investors have flocked to sectors viewed as the likely beneficiaries. These sectors include Financials and Energy, which were particularly hard hit at the onset of the pandemic and could be poised for a rebound as an economic recovery gets underway.
While Financials and Energy could stand to benefit from a reflating economy, others have been negatively impacted by recent market trends. For example, the Technology sector has lagged amid the recent rise in bond yields.
Both of these sector trends have been key drivers behind global value stocks’ outperformance relative to growth. As shown below, the FTSE All-World Value Index is significantly overweight Financials and Energy and underweight Technology relative to the FTSE All-World Growth Index.
Benchmarks matter, no matter the style
A recent blog from InvestmentMetrics discussed how many active global value equity managers were evaluated against broad-based benchmarks during the extended era of growth outperformance. These benchmarks included not just value stocks, but also high-flying growth stocks—and many active global value equity managers struggled to beat them. In an effort to boost relative performance, some value managers waded into growth territory, drifting from their style expertise and introducing unforeseen risk into investor portfolios.
While many market participants believe there might be enduring tailwinds behind value’s recent rally relative to growth, whether or not a value rotation is here to stay remains to be seen. However, regardless of whether value or growth stocks are in favor, the large dispersion in their relative performance underscores the importance of selecting a benchmark that accurately reflects global equity style. Broad-based global equity benchmarks aren’t a like-to-like comparison—and could have the unintended effect of promoting active manager style drift.
© 2021 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed Income LLC (“FTSE FI”), (7) The Yield Book Inc (“YB”) and (8) Beyond Ratings S.A.S. (“BR”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “The Yield Book®”, “Beyond Ratings®” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, FTSE Canada, Mergent, FTSE FI, YB or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of FTSE Russell products, including but not limited to indexes, data and analytics, or the fitness or suitability of the FTSE Russell products for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell products is provided for information purposes only and is not a reliable indicator of future performance.
No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing contained in this document or accessible through FTSE Russell Indexes, including statistical data and industry reports, should be taken as constituting financial or investment advice or a financial promotion.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.
This publication may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and/or their respective licensors.