When building portfolios, one strategy is to use value stocks to help balance out some of the potential risk of more growth-oriented investments. But some value stocks don’t always provide the balance advisors are looking for.
Attempts at finding value can fall short in three ways:
For example, when looking at stocks in the Russell 1000 Value Index:
Over the last decade, the performance of U.S. value stocks has lagged that of domestic growth stocks, which generally see revenue and earnings increase at a faster rate than those of value stocks.3 (The disparity between the Russell 1000 Growth and Russell Value indexes has been wide in recent years, and that difference has accelerated since the bear market lows in March.)
But COVID-19 vaccines are now being deployed, an effort that is supporting a stock market rally on hopes that world economies might be able to resume some sort of normal activity in 2021. This could create an environment that supports a pivot to value stocks. Historically, value stocks have posted their strongest returns in the recovery phase of an economic cycle.4
To see if the value stocks in your clients’ portfolios are playing their intended role and for tips on how to use a selective approach when investing in stocks, consider scheduling a portfolio consultation with a Capital Group specialist.
3Growth vs. Value Disparity, Commonwealth Financial Network, August 19, 2020.
4Will Value Managers Ever Catch a Break? FundFire, December 1, 2020.
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Russell 1000 Growth Index is a market capitalization-weighted index that represents the large-cap growth segment of the U.S. equity market and includes stocks from the Russell 1000 Index that have higher price-to-book ratios and higher expected growth values. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.
Russell 1000 Value Index is a market capitalization-weighted index that represents the large-cap value segment of the U.S. equity market and includes stocks from the Russell 1000 Index that have lower price-to-book ratios and lower expected growth values. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.
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Annualized standard deviation (based on monthly returns) is a common measure of absolute volatility that tells how returns over time have varied from the mean. A lower number signifies lower volatility.