Value has experienced a dramatic reversal in 2022, with the S&P 500® Value outperforming the S&P 500 Growth by 20% on a YTD basis as of May 25, 2022. Although one might expect this outperformance to be a boon for value managers, the data may indicate otherwise.
A majority of active large-cap value managers outperformed the S&P 500 Value in only 8 out of the past 20 calendar years. Seven of these eight years have something in common: Growth outperformed Value. How did the outperformance of Growth aid value managers?
Style bias enables us to answer this question. We refer to “style bias” as any systematic tendency in an actively managed portfolio. For example, some portfolios might typically tilt toward growth stocks, and we’d refer to this tilt as a growth bias. This is different from making near-term tactical allocations between growth and value. Style bias helps us disentangle these biases from genuine stock selection skill.
Exhibit 1 shows that a majority of large-cap value managers outperformed the S&P 500 Value in 39% (31/80) of all quarters. In the quarters when the S&P 500 Growth beat the S&P 500 Value, however, the likelihood that the majority of value managers outperformed rose to 59% (26/44). When Value outperformed Growth, the odds of active outperformance for value managers fell to 14% (5/36).
As a result, the recent underperformance of Growth implies that value managers would be unable to benefit from style bias.
Another headwind has to do with the positive skewness of equity returns: in most years, only a minority of constituent stocks outperform an index, making stock selection inherently more challenging. Exhibit 2 illustrates that only 38% of the names in the S&P 500 Value have outperformed the index thus far this year, making conditions challenging for active managers, who tend to run more concentrated portfolios.
Further, the S&P 500 Value return of -5.7% is greater than the simple average of the constituent returns (-8.1%), indicating that larger value stocks have outperformed. Berkshire Hathaway Class B and Johnson & Johnson, both of which handily outperformed the index, are the largest constituents in the index with a combined weight of 6%. The outperformance of larger value names coupled with positive skewness is doubly challenging for active managers, as it is relatively more difficult for them to overweight the larger names.
Value managers have historically benefited by tilting toward Growth. But not this year. And even within the Value realm, they are not aided by the outperformance of larger names. Value investors should keep this in mind if these trends continue.The posts on this blog are opinions, not advice. Please read our Disclaimers.