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Portfolio > Economy & Markets > Stocks

Value Funds Are Leading in 2016, From Small Cap to Large Cap

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Berkshire Hathaway’s annual shareholder meeting which took place in late April has been called the “Woodstock of Capitalism.” It’s also a hotbed for value investors who like buying stocks of great companies on the cheap.

Thus far this year, it’s value investors who are winning the perennial performance battle against their growth-oriented arch rivals. 

U.S. large-cap value stocks have gained roughly 2.70% year-to-date compared to a loss of 0.9% for U.S. large-cap growth stocks. Similar divergent performance is reflected in year-to-date mutual fund returns though the spreads are wider.

The U.S. large-cap value fund category has gained +1.40% this year while U.S. large-cap growth funds have fallen 3.47%, according to Morningstar. Performing even better are mid-cap value and small-cap value funds, which have increased by 2.58% and 2.12% respectively.

Value stocks generally pay dividends and have lower price-to-book and price-to-earnings ratios compared to their growth equity counterparts.

As a group, the performance of large-cap growth stocks has been slowed by subpar returns for classic growth industry sectors like healthcare and technology. S&P 500 healthcare stocks have slid 3.6% since the start of the year while S&P 500 technology stocks have lost 0.86% compared to a 0.65% gain for the broader S&P 500. Apple (AAPL) shares, which account for almost 13% of the SPDR tech sector, are off 11% year-to-date.

During the first quarter, large-cap U.S. growth funds suffered outflows of $8.35 billion putting the group among the biggest net losers of assets, according to Thomson Reuters Lipper. Nevertheless, some fund families are still attracting healthy inflows.

A pair of new funds that use both growth and value strategies from Bridge Builder have enjoyed brisk asset growth since being launched on April 27, 2015. The Bridge Builder Large Cap Growth Fund (BBGLX) raked in $2.54 billion during the first quarter while the Bridge Builder Large Cap Value Fund (BBVLX) grew by $2.22 billion. Despite limited performance history, both funds have bucked the industry-wide trend in mutual funds of asset outflows.

Investors with a value bias expect the trend of lower valuations in the future to favor their investing style.

“The bulls will presumably argue that this Fed impact is now part of the accepted wisdom, and that P/Es should remain higher than [common] history in order to reflect the Greenspan/Bernanke/Yellen Put,” said James Montier and Philip Pilkington at GMO, an investment firm that slants toward value investing.

From a historical perspective, stretched valuations for U.S. stocks seem to agree with value investors.  

Jonathan Clements, author of the upcoming book “How to Think About Money” observes that S&P 500 companies currently trade at cyclically adjusted price-earnings (CAPE) ratios of 26.1 versus a 25-year average of 25.8 and a 50-year average of 19.7. CAPE takes into account current share prices divided by the average of ten years worth of earnings  adjusted for inflation.

“The bears will suggest that if ever there were a time for the scales to fall from investors’ eyes over the Wizard-of-Oz-like nature of the Fed, then this is it. We (the authors, as opposed to the collective ‘we’ at GMO) are inclined to the latter view,” added Montier and Pilkington.

Meanwhile, U.S. small and mid-cap value oriented mutual funds are delivering better relative performance against their growth peers and the broader stock market. Top year-to-date performing mid-cap value funds include CM Advisors (CMAFX), up 15.25%; GoodHaven (GOODX), up 9.19%, and Virtus Contraria Value (VMVRX), with a gain of 8.14%.

In the U.S. small-cap value category, outperformers leading the way include Aegis Value (AVALX), gaining 46.39%; Footprints Discovery Value (DAVAX), up 22.82%; and CM Advisors Small Cap Value (CMOVX), up 19.28%.

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