Claris subscribes to a philosophy called evidence-based investing. In short, we manage our clients’ portfolios according to the findings of rigorous academic studies and peer-reviewed publications. We ignore the Wall Street hype and 24/7 financial media. Why? Because the preponderance of academic studies show that decisions based on evidence and fact are better suited to helping you achieve your financial goals.
A main finding of the evidenced-based investing philosophy is that equities which fall into the category of “value” provide higher returns over time. Here’s the evidence: Since 1927, large-cap value stocks in the US have returned 11.1% per year while large-cap growth stocks have returned 9.4% per year. In the small-cap space, the difference is more pronounced: Value has returned 14% per year vs. 9.2% for growth.
The simplest way to describe value is this: a stock that tends to trade at a lower price relative to its fundamentals. These fundamentals include metrics such as price to earnings ratio and price to book ratio. We do not attempt to guess which of these value stocks will be the best performers in the future. Again, the evidence shows that no one is capable of consistently picking winners.
Many of our clients have noticed that this value premium has not been present recently, and this is an accurate observation. Over the past 10 years, domestic value stocks have returned just less than 7% per year while growth stocks have returned just above 9% per year. If one were to examine these returns on a global level, they would find similar under-performance.
Does all of this mean that it’s time to abandon the evidence-based value strategy? We feel (and the evidence proves) that this abandonment would be hazardous to your wealth. A disappearing value premium is nothing new. Studies show that since the late 1970s, growth outpaces value in 27% of all rolling 10 year periods. Simple math will tell us that this means that value beat growth 73% of the time over these rolling 10 year periods. So, absent a crystal ball, which strategy do we want to pursue?
Until someone can figure out a way to guess when value or growth will outperform, we will continue to advise our clients to tilt portfolios toward small-cap and value, and let the magic of capital markets do the rest.
Should you have any questions or would like more information, please don’t hesitate to contact Claris.
