A New Era Dawning for Value


For the one year ending September 30, 2019, the Russell 1000 Value Index returned 4.0% outperforming the Russell 1000 Growth Index, which returned 3.7%. In the month of September alone, the pendulum significantly swung in favor of value stocks with the Value Index outperforming its Growth counterpart by 356 bps. We believe as a result of an increased interest in value stocks and improved investment sentiment, the S&P 500 Value Index is up 2.83% over the three months ending September 30, nearly four times the increase of its growth counterpart.

Since the Great Financial Crisis, investors have been fearful and nervous grappling with an uncertain and anemic economic growth environment. The past five years have been conducive to the outperformance of growth strategies and therefore has overwhelmed the 10-year returns. Growth stocks, which typically have earnings independent from the overall economy, were most favored as investors were willing to pay up for companies that displayed current high earnings growth. As investors tend to travel in herds, growth styles have become over crowded gaining positive momentum while the neglected value style lagged. During this growth environment, TCW Relative Value Large Cap strategy has outperformed the Russell 1000 Value Index on a net basis, 6 of the last 10 calendar years, and 2 of the last 3 years ending 2018 with zero style drift. TCW Relative Value Large Cap is attractive in a rising market, as historically, the strategy has displayed more upside return.

What portends the turning of the tide from Growth to Value?

As all things, Growth and Value are usually cyclical. Value tends to do better when the economy troughs at the end of a business cycle and when investors believe the environment is starting to look better. At this stage, investors have the ability to look forward 1 to 2 years for earnings growth. As the first chart on the following page illustrates, historically, as profits accelerated from 1982 through September 30, 2019, the Russell 1000 Value Index grew 16% per year, capturing 94% of the Russell 1000 Growth Index gains, even when including the tech bubble years (1998-2000) when Growth overall performed well. Excluding the tech bubble, the second chart shows Value outperformed when profits accelerated.

Including the Russell 1000 Growth Index gains of 48% annualized returns during the Tech Bubble, 1998-2000, the Russell 1000 Value captured 94% of the Growth returns when profits accelerate.

If we exclude the Tech bubble, Value wins when profits accelerate

Source: S&P, Russell, BofA Merrill Lynch US Equity & US Quant Strategy As of September 30, 2019.
Style Index performance during periods of decelerating and accelerating S&P 500 Index earnings growth (1982-present)

Profit cycles matter more than interest rates for Value to outperform Growth. Since 1926, accelerating profits constitute 92% of the return during rising rate environments and 88% of the returns during falling rate environments.

Value vs. Growth spread annualized average quarterly performance during profit and rates cycles since 1926

Note: Growth and Value Indices based on Farma-French measure of Growth and Value
Source: BofA Merrill Lynch US Equity and US Quant Strategy, Fama-French Benchmark Portfolios historical returns, Federal Reserve Board

S&P 500 earnings are expected to trough in Q3:19* and accelerate to double digits by 2H:20. Massive global easing should aid in the acceleration with the U.S., Chinese, European, New Zealand, Thailand, Indian, and Australian central banks each in stimulus mode for the last six months. In our view, positive effects from synchronized global easing should be felt by year end and into the first half of 2020.

Earnings Expected to Bounce Back S&P 500 Growth YoY EPS Growth

Source: TCW, Bloomberg, Strategas, Bank of America, and Factset
Q3:19: With only 90% of companies reporting.

Growth looks expensive on multiple valuations such as book value, trailing/forward earnings, and sales. For example, the chart below illustrates that Value versus Growth is priced at over two standard deviations below the mean on a price-to-book basis as measured by the Russell 1000 Value and Growth Indices. Historically, a gap this extreme has led to significant value outperformance over multiple years. We believe investors should be aware of stylistic imbalances in their portfolios and stop thinking of value as “an insurance policy” and consider using Value as an offensive play to prepare for a regime change in the growth-versus-value cyclical performance trend. We always advocate for diversification, especially at times when valuations are stretched, and history creates a compelling case for an imminent change in market leadership. The economic cycle, profit cycle, global easing, and valuations all create a favorable backdrop to support the nascent trend we have been seeing for value to take the performance “baton”.

Relative Price-to-Book – Value vs. Growth the Uptick for Value in 2018 has Room to Grow

Source: TCW, Bloomberg, Strategas, Bank of America, and Factset
*Q3:19: With only 90% of companies reporting.

“With valuations in many stocks and value sectors close to historically low levels, it is not surprising companies flush with cash and availability to low interest rates have begun to step up strategic. While investors appear to have neglected value stocks for the past several years, firms are recognizing value and purchasing attractive companies that have been successfully executing on internal self-help catalyst(s), which have led to greater cash flow, operating margins, and earnings. This is why value investing cannot die.”
- Diane Jaffee, Senior Portfolio Manager of the TCW Relative Value strategies

A look back at history Since 1969, Value has outperformed on an annualized basis with less volatility as measured by standard deviation. There have been other periods where Growth dominated Value investing such as the five years ending 1991 when Value outperformed only one of the years. Post 1991, Value outperformed three of the next five years and 11 of the next 15 years.

Value vs. Growth: The Market Leadership Cycle

Historically, Value Outperformed Since Inception and Conclusively Post Other Growth Phases Such as the One Ending 1991.

Source: TCW, Bloomberg, Strategas, Bank of America, and Factset
*Q3:19: With only 90% of companies reporting.


TCW Relative Value Large Cap Composite Performance
As of September 30, 2019

The TCW Group, Inc. is divided into three divisions: the Marketable Securities Division; the Alternative Products Division; and the Managed Accounts Division. Effective January 1, 2000, the Marketable Securities Division was established to provide investment advisory services in the marketable securities area. The Marketable Securities Division is defined as the Firm for purposes of reporting performance in accordance with the Global Investment Performance Standards. On February 23, 2010, The TCW Group, Inc. acquired Metropolitan West Asset Management, LLC. On January 1, 2011, the Marketable Securities Division and Metropolitan West Asset Management, LLC completed a merger. Accordingly, effective January 1, 2011, Metropolitan West Asset Management, LLC was included within the Firm definition. The TCW Relative Value Large Cap composite is comprised of portfolios whose objective is to outperform the benchmark over the long term by investing in securities with market capitalization generally greater than $1 billion and valuation criteria less than the overall market. While TCW’s objective is to outperform the stated benchmark it does not imply that this strategy shall share, or attempt to share, the same or similar characteristics of the benchmark or attempt to track the benchmark. The Russell 1000® Value Index measures the performance of those Russell 1000® companies with lower price-to-book ratios and lower forecasted growth values. Returns are calculated in U.S. dollars. Leverage or derivatives are not used in the management of this composite. Returns include the reinvestment of all earnings. Investment directly into an index is not possible. Investments in the strategy will be subject to fees and expenses that will reduce returns. The Marketable Securities Division claims compliance with the Global Investment Performance Standards (GIPS®). To receive a complete list and description of TCW’s composites and/or presentation that adheres to the GIPS® standards contact Client Services at 213.244.0000 or contact us by e-mail at PortfolioAnalytics.Group@tcw.com.

London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2018. FTSE Russell is a trading name of certain of the LSE Group companies. Russell® is a trade mark(s) of the relevant LSE Group companies and is/are used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.


This material is for general information purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any security. Any issuers or securities noted in this document are provided as illustrations or examples only, for the limited purpose of analyzing general market or economic conditions and may not form the basis for an investment decision, nor are they intended to serve as investment advice. Any such issuers or securities are under periodic review by the portfolio management group and are subject to change without notice. TCW makes no representation as to whether any security or issuer mentioned in this document is now in any TCW portfolio. TCW, its officers, directors, employees or clients may have positions in securities or investments mentioned in this publication, which are subject to change without notice. Any information and statistical data contained herein derived from third party sources are believed to be reliable, but TCW does not represent that they are accurate, and they should not be relied on as such or be the basis for an investment decision. All information is as of the date of this presentation unless otherwise indicated.

An investment in the strategy described herein has risks, including the risk of losing some or all of the invested capital. An investor should carefully consider the risks and suitability of an investment strategy based on their own investment objectives and financial position. There is no assurance that the investment objectives and/ or trends will come to pass or be maintained. The information contained herein may include preliminary information and/or “forward-looking statements.” Due to numerous factors, actual events may differ substantially from those presented herein. TCW assumes no duty to update any forward-looking statements or opinions in this document. This material comprises the assets under management of The TCW Group, Inc. and its subsidiaries, including TCW Investment Management Company LLC, TCW Asset Management Company LLC, and Metropolitan West Asset Management, LLC. Any opinions expressed herein are current only as of the time made and are subject to change without notice. The investment processes described herein are illustrative only and are subject to change. Past performance is no guarantee of future results. © 2019 TCW


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