In the current climate of global macroeconomic turbulence, the value investing approach may compensate for rising interest rates, persistent inflation, and economic slowdowns, contends an article in Barron’s. Value investing fell out of favor in the last 10 years amidst an overly robust economy, resulting in an enormous return differential between growth and value stocks of 147.2% by the end of 2021, according to data from Morningstar.
Of course, the pandemic reversed those conditions, and the tailwinds that pushed growth stocks to skyrocket pre-pandemic are still weakening, allowing value stocks to offer a less risky, safer haven in two main ways. First, value stocks offer a lowered duration risk because those companies usually pay out a greater portion of their cash flow to their shareholders. While inflation eats away at purchasing power, returning capital sooner rather than later is much more beneficial than investing that cash into future growth, which is what growth companies generally do. Second, since growth strategies lean more toward sectors with recent earnings growth, portfolios with a growth strategy tend to be less diversified, whereas value investing usually lends itself to more sector diversification. The S&P 500 Value Index has a much broader sector allocation than the iShares S&P 500 Growth ETF, which is mainly focused on only four sectors with its highest concentration in the Information Technology sector at 42% of the fund. As industry cycles shift, or economic conditions weaken, the value index is more likely to weather a downturn because of its diverse allocations across many sectors, the article maintains.
Value investing has historically outperformed growth by an average of 4.1% since 1927, and the approach can help investors stay focused on their long-term goals while shielding their portfolio from anything a turbulent economy can throw at it.