Is Value Still Valuable?

Lately, Value has not been very valuable within small cap stocks. Save for a couple of weeks last December, the Russell 2000 Value Index (RUJ) has underperformed its Russell 2000 Growth Index counterpart (RUO) on a rolling 13-week basis since February 2017. The chart below shows the relative price difference between the Russell 2000 Growth Index and the Russell 2000 Value Index. The teal bars represent 13-weeks and the navy line 52-weeks. Both are rolling compounded returns.


Source: Bloomberg, 361 Capital. ROU minus RUJ weekly price returns, compounded on a rolling 13- and 52-week basis.

 

The return spread has rebounded from its post-crisis low reached at the end of 2016 and is now hovering around a level seen in previous cycle highs. Looking at this from the middle of 2003 (thus excluding the tech wreck), the spread has broken through one standard deviation above average seven times, including the current run. During the previous six occasions, the 52-week spread remained at or above the one standard deviation level for about 24 weeks. The end of March marked the 18th consecutive week that it was above one standard deviation. Over this time, RUO’s relative performance on a 52-week basis has only breached a two-standard deviation level once. That was at the end of 2007.

For those of us that believe there is value in Value, when this trend will reverse is forefront of the mind. The current environment may feel extreme, but is certainly not abnormal. Market cycles and the relative attractiveness of factors ebb and flow over time. The Russell 2000 Value Index outperformed the Russell 2000 Growth Index for the last week of March, but it is unclear whether this is the start of a reversal or just a blip in the RUO’s continued outperformance.

There is no telling exactly when this will change. The catalysts could potentially be brewing in the market and overall economy already. Whether the recent rise in market volatility is an indication of this change in leadership is yet to be seen, but now is as good a time as ever to be thinking about Value as a valuable component to your portfolio.

To read more about the market conditions currently facing active managers, read our first quarter Wall Street Mood Monitor >