A new white paper from quantitative investment management firm Versor Investments, has revealed that the last time the valuation spread between value stocks and growth stocks was as extreme as it is now, was at the end of the technology boom in 2000.
The paper titled “Value Returns in 2021: Mirage or Oasis”, is co-authored by Versor Founding Partners Deepak Gurnani and Ludger Hentschel who have over 40 years of combined experience in quantitative investing and research.
Although value investment styles have severely underperformed for the past several years, the paper highlights that early 2021 has seen positive value returns. Furthermore, these positive returns have done little to shrink these extreme value spreads, which the authors conclude, gives runway for further gains in value investing. The paper’s title references this shift in value performance, which may be the first signs of the beginning of a recovery in value.
Accordong to the paper, nearly all value styles suffered large losses in 2020. As a result, valuation spreads have widened to extreme levels. The behaviour of value spreads during 2020 meanwhile, was as unusual as during the peak of the technology boom, and even though higher interest rates may lead to lower equity returns, environments with moderate or low equity market returns tend to be better for value investments.
“It may finally be the beginning of a value recovery. Covid relief programs have produced a range of government support efforts. In early 2021, however, there were signs that the rapid increase in government debt required to fund these programs may finally stop interest rates from falling ever lower,” says Gurnani. “Should interest rates inch higher, they may disappoint investors who priced stocks based on extremely low discount rates. A repricing of stocks based on higher interest rates favour value investments.”
Versor Investments is well known for quantitative research, having published over 30 white papers available to investors via the newly launched Athenaeum library section of its website. Topics range from tactical asset allocation to enhancing hedge fund portfolio returns.
