Value Finally Has Its Day, but Will that Last?

Value stocks have finally edged ahead of growth after a long spell of underperformance. For almost three months now, value has outpaced growth: The S&P 500 value index has leapt ahead 12%, compared to 5.7% for the growth benchmark.

Could this be lasting? After all, growth stocks have dominated for the past decade—except for a brief period in 2016 during the oil bust, when recession fears mounted. “Understandably, investors wonder if this move is nothing more than a head fake,” wrote Sam Stovall, chief investment strategist at research firm CFRA, in a research note.

OK, but luminaries ranging from Benjamin Graham to Warren Buffett stand behind value investing as a sure-fire winning strategy in the long run. And statistics show that value has outdone growth over the many decades. So why shouldn’t this natural superiority keep on keeping on today?

Value stocks trade below their intrinsic value, namely what they should be worth given their fundamentals. But fast-growing tech and healthcare stocks have eclipsed them for a long time, and investors have overwhelmingly preferred these momentum plays until recently.

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Lately, though, the climate has changed. Washington politicians’ qualms about the likes of Facebook and Twitter have tarnished some of the tech names’ luster lately. Both companies’ shares are down since July. The negative vibe has arisen thanks to talk, at least from Democrats, about imposing Medicare for all, of shutting private health insurance and clamping down on drug prices.

One other reason the turnaround is happening is that value has become even cheaper. To Cliff Asness, founder of quantitative fund manager AQR Capital Management, investors snubbing of value made sense for many years, but more recently their fundamentals have improved sufficiently to merit a reappraisal. Their earnings have improved but not their prices, which makes for even lower price/earnings multiples.

“Value fundamentals have not come in worse over this recent painful period, it’s prices alone that have gone the wrong way,” Asness said. “When losses are due to price moves, not fundamentals, and occur over shorter periods, that is when things actually cheapen.”

As Stovall emphasized, the value index is trading at a 4% discount to its average P/E since 2003, while the growth index is at a 24% premium. That’s not that investors are exactly shunning growth stocks, he said. Instead, they are including value shares, too.

He said “the market is rotating rather than retreating, meaning that we are seeing a gravitation toward more attractively valued sectors, styles and sizes rather than a cashing out altogether.”

Alas for value, if the economy skirts a recession and keeps rolling, the vaunted investing style’s day in the winner’s circle may fade away, as it has in the past.

Value-Growth Gap Widest in 70 Years, Study Says

The Value Investing Disconnect

Tags: Cliff Asness, Facebook, growth stocks, S&P 500, Sam Stovall, Twitter, value stocks

The funded ratio for the 100 largest US corporate pension plans rose to 86.1% during October from 85.4% at the end of September, while their deficit improved by $11 billion primarily due to a 1.08% investment gain, according to actuarial and consulting firm Milliman.

The market value of assets of the pension funds improved by $13 billion during the month to $1.593 trillion from $1.580 trillion at the end of September. The 1.08% investment gain was more than twice the 0.53% monthly median expected investment return during 2018 as reported in the 2019 Milliman Pension Funding Study.

Liabilities for the plans increased by $2 billion as a result of a one basis point decrease in the discount rate to 3.08% as of Oct. 31 from 3.09% at the end of September. October’s month-end discount rate was the second lowest discount rate recorded in the 19 years Milliman has been tracking the funded status of the 100 largest corporate pension funds.

“Over the past 12 months the pension funded ratio has sharply fallen, thanks to the record low interest rate environment,” Zorast Wadia, a principal and consulting actuary at Milliman, said in a release. “However, low interest rates also make borrowing strategies viable if plan sponsors have access to cash. Plan sponsors may want to explore options that take advantage of low rates as one way to fund up their plans.”

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During the last 12 months to October, the deficit of the pension funds has widened by $147 billion despite asset returns of 8.34%. This was the result of falling discount rates, which were down from 4.40% at the same time last year. As a result, the funded ratio of the funds has fallen sharply during the past 12 months from 93.0%.

Milliman said if the funds earn the expected 6.6% median asset return per the 2019 pension funding study, and if the current discount rate of 3.08% is maintained through 2020, the funded status of the surveyed plans would increase to 86.7% by the end of 2019 and 90.3% by the end of 2020. The forecast assumes 2019 and 2020 aggregate annual contributions of $50 billion.

Under an optimistic forecast with interest rates rising to 3.18% by the end of 2019 and 3.78% by the end of 2020, the firm said the funded ratio would surge to 88% by the end of 2019 and 103% by the end of 2020. That assumes robust annual asset gains of 10.6%.

Using a pessimistic forecast with the discount rate falling to 2.98% at the end of 2019 and 2.38% by the end of 2020, the funded ratio would fall to 85% by the end of 2019 and 78% by the end of 2020. That assumes annual asset returns of 2.6%,

Pensions in Critical Status Fewest in Decade

Rising Rates Boosts Corporate Pension Funded Status by $38 billion

Tags: corporate pensions, Funded Status, Milliman, Milliman 100, US, Zorast Wadia