Growth to Value Rotation

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m@ver1ck
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Growth to Value Rotation

Post by m@ver1ck »

Hearing a lot about growth to value rotation in the news lately. Can someone explain this please? I don’t quite understand what I’m reading - or it doesn’t really make much sense to me.
Not sure why the current environment would cause this rotation?
tomsense76
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Re: Growth to Value Rotation

Post by tomsense76 »

Largely this is noise that can be tuned out

That said, what are they saying. Basically they are saying growth stocks (like FAANG; tech, communication services, etc.) have gone up a lot and now investors are moving into value stocks (energy, healthcare, financials, etc.).

Why is that happening? Hard to say. It could be investors selecting individual stocks think that growth stocks are too expensive and so they are diversifying out of them. Or it could be those value companies are starting to perform better. Or it could be that investors looked at value stocks that really took a beating and thought there was a really good deal. It's hard to know if any or none of these are true. Also it could be some mix of factors that influenced some investors more-or-less depending on the factor.

Anyways this is why I said initially this is pretty noisy. Not a lot of signal to find here unfortunately. More importantly if you are following a Boglehead portfolio (owning total market funds), this doesn't effect you as you own both growth and value. If one does better, it helps you. If another does better, it still helps you
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
tibbitts
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Re: Growth to Value Rotation

Post by tibbitts »

m@ver1ck wrote: Mon Jun 07, 2021 11:22 pm Hearing a lot about growth to value rotation in the news lately. Can someone explain this please? I don’t quite understand what I’m reading - or it doesn’t really make much sense to me.
Not sure why the current environment would cause this rotation?
What was it about previous environments that caused rotation - but isn't present now?
Topic Author
m@ver1ck
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Re: Growth to Value Rotation

Post by m@ver1ck »

I've got a bunch of growth stocks in my 401K - this was the best performing fidelity mutual funds - and have been performing great since several years now. when I got involved with the bogleheads philosophy I essentially got a bunch of Wellington in my Vanguard Rollover IRA to act as a counter balance this.

Now that I have enough in my retirement funds to hit my targets in 10 years with with just a VTSAX/VBTLX, I'm looking at taking on more risk. No need, but ability and willingness.

So in that context, wondering if it would be prudent to invest in Vanguard Growth in order to seek alpha - or whether this whole rotation to value is something that will change things around.

Also looking at investing a very small portion in stuff like ARK - that could go up - or go down to 0. Not more than 50K, about 2.5%. I'm doing that instead of splurging on a newer car. Happy to drive my subaru.
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m@ver1ck
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Re: Growth to Value Rotation

Post by m@ver1ck »

tibbitts wrote: Tue Jun 08, 2021 12:15 am
m@ver1ck wrote: Mon Jun 07, 2021 11:22 pm Hearing a lot about growth to value rotation in the news lately. Can someone explain this please? I don’t quite understand what I’m reading - or it doesn’t really make much sense to me.
Not sure why the current environment would cause this rotation?
What was it about previous environments that caused rotation - but isn't present now?
I have no idea - they talk about interest rates - but it makes no sense to me. I can't get my head around why growth would be better in one environment and value in another. TBH - I find these labels nonsensical - they talk of msft as growth, but then wellington a classical value fund holds tonnes of msft. If value is defined as undervalued - I'd say it's not really undervalued - it's cheap for a reason. And growth stocks command higher multiples for a reason...
but still - this isn't about me - this is about me trying to grok what I might be missing.

It's not what you don't know - it's what you know that just ain't so - mark twain... - or something like that...
gougou
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Re: Growth to Value Rotation

Post by gougou »

Growth stocks typically have higher P/E ratio and high expected growth rate into the future. They don’t make much money today so they don’t pay much dividend. Such as tech stocks like AMZN which has 80x P/E but growing EPS 30%+ yoy.

Value stocks typically have low P/E ratio, low expected growth rate and mostly pay some dividends or buyback stocks to reward shareholders. An example is BTI which is a tobacco company with 10x P/E and pays a 7.5% dividend.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
invest4
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Re: Growth to Value Rotation

Post by invest4 »

Nobody knows nuthin’

You could also take additional risk by changing your AA instead of adding complexity and making bets on which asset classes will fare the best in the future.
magneto
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Re: Growth to Value Rotation

Post by magneto »

Growth Stocks (hi P/B) had got ahead of themselves price-wise.
Value Stocks (lo P/B) were directionless at low levels.
The situation changed in recent months, with Growth stalling and Value climbing.
So all this is now very much yesterday's story - with Growth now perhaps becoming more interesting price-wise.

Many seasoned investors will point out the basic misunderstanding in this tentative P/B classification divide, since Growth must always be a feature of Value.
It is simpler to first recognise the growth rate of any prospective investment, then consider the price to be paid.
'There is a tide in the affairs of men ...', Brutus (Market Timer)
Ramjet
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Re: Growth to Value Rotation

Post by Ramjet »

In general, low interest rates favor growth companies and higher rates favor value companies. This has to do with the future value of money. Let's say interest rates are at 0% and a company is expecting 100M cash flow in the next 3 years. If something in the economy changes and we experience inflation and interest rates rise to say 3%, that 100M is worth less. This may make the price of the company's stock decline
Last edited by Ramjet on Tue Jun 08, 2021 1:00 pm, edited 1 time in total.
ckangas
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Re: Growth to Value Rotation

Post by ckangas »

Ramjet wrote: Tue Jun 08, 2021 11:21 am In general, low interest rates favor growth companies and higher rates favor value companies. This has to do with the future value of money. Let's say interest rates are at 0% and a company is expecting 100M cash flow in the next 3 years. If something in the economy changes and we experience inflation and interest rates rise to say 3%, that 100M is worth less. This may make the price of the companies stock decline
Value stocks also tend to have more debt. And they will benefit from higher inflation / suffer from lower inflation as a result.
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arcticpineapplecorp.
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Re: Growth to Value Rotation

Post by arcticpineapplecorp. »

if you hold a total stock market index fund you have both value and growth so you don't have to worry about which is outperforming when. You've got it all. See here:

Image

and this

Image
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NiceUnparticularMan
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Re: Growth to Value Rotation

Post by NiceUnparticularMan »

It is pretty much nonsense.

One can observe that for a while, growth stocks were increasing in price faster than value stocks, and just recently the opposite has been true.

The idea this is caused by some identifiable "rotation" though is trying to impose the sort of physical metaphor on these observations that tricks our predator/prey brains into assuming the continuation of "movement" when no such assumption is actually warranted as applied to these systems.

To be clear, there are other observable periods of time in the past when growth has outperformed value, and then when value has outperformed growth. And in that sense it has flipped and flopped back and forth.

But the timing of these flips and flops is only really known in retrospect. There is no reason to believe anyone can actually predict when a flip will start, and then when the flop back will start, and on and on.

Now personally, I do believe there is a long-term risk premium associated with value stocks. And for that and other reasons, I committed to investing with a value tilt through accumulation, with the understanding that likely came with higher risks.

But I would avoid these metaphors that trigger unfortunate instincts.
ckangas
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Re: Growth to Value Rotation

Post by ckangas »

NiceUnparticularMan wrote: Tue Jun 08, 2021 12:42 pm It is pretty much nonsense.

One can observe that for a while, growth stocks were increasing in price faster than value stocks, and just recently the opposite has been true.

The idea this is caused by some identifiable "rotation" though is trying to impose the sort of physical metaphor on these observations that tricks our predator/prey brains into assuming the continuation of "movement" when no such assumption is actually warranted as applied to these systems.

To be clear, there are other observable periods of time in the past when growth has outperformed value, and then when value has outperformed growth. And in that sense it has flipped and flopped back and forth.

But the timing of these flips and flops is only really known in retrospect. There is no reason to believe anyone can actually predict when a flip will start, and then when the flop back will start, and on and on.

Now personally, I do believe there is a long-term risk premium associated with value stocks. And for that and other reasons, I committed to investing with a value tilt through accumulation, with the understanding that likely came with higher risks.

But I would avoid these metaphors that trigger unfortunate instincts.
Certain economic conditions favor value or growth, so while I don't think we can use these "rotations" to time the market, the conditions may be useful to keep in mind.
For example, there are valid reasons value does better in high inflationary environments (although it still suffers once inflation goes high enough). So if inflation is a large concern/risk for your portfolio, one could do a value tilt. Not necessarily because they expect a high return, but because value would typically perform better in the scenarios they were concerned with. For example, if inflation stays low, other assets may perform better and compensate for the lower value equity returns.

Although this isn't really a BH approach; holding the market at cap also seems fine since eventually value will pick up market share in those conditions anyways.
Last edited by ckangas on Tue Jun 08, 2021 2:19 pm, edited 1 time in total.
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arcticpineapplecorp.
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Re: Growth to Value Rotation

Post by arcticpineapplecorp. »

often the value outperformance comes very quickly. If you're not holding value during those short quick bursts, you don't actually capture the premium. Often people give up on value because the underperformance relative to growth can occur for long periods of time, then investors bail and the premium comes up in large short bursts. It's a behavioral thing. If you're not going to maintain your position (whatever tilt) to value, you'd be better off not chasing performance.

The chart below is small cap value, which is supposedly the highest potential returns (aside from small cap value emerging markets) but look at the underperformance relative to growth (19.5 years, 13 years, 17 years, 14+ years) but the outperformance happened in just 3 years, 3 1/2 years, 7 years and 5 years...

Image
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David Jay
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Re: Growth to Value Rotation

Post by David Jay »

m@ver1ck wrote: Tue Jun 08, 2021 1:03 amNow that I have enough in my retirement funds to hit my targets in 10 years with with just a VTSAX/VBTLX, I'm looking at taking on more risk. No need, but ability and willingness.
The biggest control knob for risk is asset allocation (stock to bond ratio). Pretty much everything else (sectors, rotation, single stock picking) will have less reliable results than moving your AA 20 percentage points (i.e. 60/40 -> 80/20, etc.).
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
NiceUnparticularMan
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Re: Growth to Value Rotation

Post by NiceUnparticularMan »

ckangas wrote: Tue Jun 08, 2021 1:06 pm
NiceUnparticularMan wrote: Tue Jun 08, 2021 12:42 pm It is pretty much nonsense.

One can observe that for a while, growth stocks were increasing in price faster than value stocks, and just recently the opposite has been true.

The idea this is caused by some identifiable "rotation" though is trying to impose the sort of physical metaphor on these observations that tricks our predator/prey brains into assuming the continuation of "movement" when no such assumption is actually warranted as applied to these systems.

To be clear, there are other observable periods of time in the past when growth has outperformed value, and then when value has outperformed growth. And in that sense it has flipped and flopped back and forth.

But the timing of these flips and flops is only really known in retrospect. There is no reason to believe anyone can actually predict when a flip will start, and then when the flop back will start, and on and on.

Now personally, I do believe there is a long-term risk premium associated with value stocks. And for that and other reasons, I committed to investing with a value tilt through accumulation, with the understanding that likely came with higher risks.

But I would avoid these metaphors that trigger unfortunate instincts.
Certain economic conditions favor value or growth, so while I don't think we can use these "rotations" to time the market, the conditions may be useful to keep in mind.
For example, there are valid reasons value does better in high inflationary environments (although it still suffers once inflation goes high enough). So if inflation is a large concern/risk for your portfolio, one could do a value tilt. Not necessarily because they expect a high return, but because value would typically perform better in the scenarios they were concerned with. For example, if inflation stays low, other assets may perform better and compensate for the lower value equity returns.

Although this isn't really a BH approach; holding the market at cap also seems fine since eventually value will pick up market share in those conditions anyways.
Yes, I don't particularly have a problem with the logic of value-tilting as a de facto unexpected inflation hedge (I better not, because I somewhat reason that way myself).

But my caveat for that is insurance generally comes at a cost, and if you don't end up needing it, you should expect to be out that cost.

So, if unexpectedly high inflation does NOT show up, one should expect this aspect of value tilting to actually be costly, not beneficial. But as you suggest, maybe not so costly as to ruin a plan. You just might think in retrospect, you could have done a bit better without paying for this insurance, since it turns out you didn't need it.

Which I am fine with.
NiceUnparticularMan
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Re: Growth to Value Rotation

Post by NiceUnparticularMan »

arcticpineapplecorp. wrote: Tue Jun 08, 2021 1:26 pm often the value outperformance comes very quickly. If you're not holding value during those short quick bursts, you don't actually capture the premium. Often people give up on value because the underperformance relative to growth can occur for long periods of time, then investors bail and the premium comes up in large short bursts. It's a behavioral thing. If you're not going to maintain your position (whatever tilt) to value, you'd be better off not chasing performance.

The chart below is small cap value, which is supposedly the highest potential returns (aside from small cap value emerging markets) but look at the underperformance relative to growth (19.5 years, 13 years, 17 years, 14+ years) but the outperformance happened in just 3 years, 3 1/2 years, 7 years and 5 years...

Image
I'd personally question the dating of some of those lines (like sometimes there is another new peak not too long after the green line is cut off), and generally looking at excess performance periods only once the last peak is exceeded doesn't necessarily capture the psychology of when people will start talking up small-value returns again.

Still, I think the general point stands that most of the premium has shown up in relatively short periods (even if not quite as short as that particular chart suggests).
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