Observation - A tale of two markets (no links)

hank

It’s amazing how wide the gap is this year between value and growth. Once upon a time Price’s Equity Income fund PRFDX was their flagship equity offering. It’s one of their oldest funds. For many years it was headed by the very capable Brian Rogers, something of a media celebrity in his day. The fund holds a lot of income producing companies and tilts toward value. It’s off a whopping 12.4% YTD. and has stumbled badly for years now. By contrast, Vanguard’s S&P index fund, VFINX is ahead YTD by 9.11% YTD. That’s a gap of about 21% YTD between the two funds. Even crazier, Price’s Blue Chip TRBCX is up 29.3% this year for a YTD difference of more than 40% between the two funds. Absolutely amazing.

I think this all means something important for us to consider, but I’m not sure what. Smarter people than me can chime in. I got my numbers from Lipper and believe them to be accurate. If you own Price’s diversified income fund, RPSIX, and are wondering why it’s only ahead by 1% YTD, look no further than PRFDX which it holds at generally around a 12% weighting (but it varies).

Disclaimer - I do not own any of the 3 mentioned equity funds and haven’t for at least 5 years. I do, however, own RPSIX.

davfor

"Smarter people" suggest that......

Value stocks outperformed growth for half a year after every presidential election since 1980, according to research by Larry McDonald and his team at the Bear Traps Report.



New administrations often pass a lot of spending bills that rev up the economy. Value stocks typically outperform when growth picks up. One reason is that when there’s more growth around, investors no longer pay up for what was once a narrower swath of growth plays.

https://marketwatch.com/story/value-stocks-are-poised-to-crush-growth-stocks-after-the-presidential-election-2020-10-09

Mark

"New administrations often pass a lot of spending bills that rev up the economy." He premised that on one party controlling both the white house and the senate. As much as I'd like to see a regime change in Washington I'm not betting on it yet. We'll see.

msf

Brian Rogers was also the first manager of T. Rowe Price Value fund (TRVLX). He managed it for nearly a decade. Over that span, TRVLX returned a total of 154%, while PRFDX returned 121%. That's about a 2% difference per year. Even back then PRFDX had lost a bit of its shine. It was still outperforming its peers, but not its benchmark Russell 1000 Value.

M* comparison chart

(I'm still waiting for some life out of value, but hedging my bets.)

Graust

@msf

Would DSEEX/DSENX be a decent way to play value, while waiting for value to come back into vogue? I know it vacillates between blend and value, but it seeks the most value in the current market, while still participating in “growthier” investments (seemingly, anyways). Just a thought....and I always debate on owning some but never seem to get around to buying any of that fund.

Thanks

bee

Wouldn't VFINX or SPY be classified as a blend of Large Cap Value and Growth? Just own a blended fund and wait. A Russell 1000 index would cover an even larger number of both growth and value.

Over the last 20 years QQQ (Growth) has played catched up to blended funds like SPY and VTI. The catch up has really happened over the last 10 years.

hank

bee said:

”Wouldn't VFINX or SPY be classified as a blend of Large Cap Value and Growth?”

That sounds right @bee. The line between growth & value is a bit muddled in my post. I generally look-up VFINX (out of laziness) when interested in how the S&P is doing - though it’s not an exact replica. Price’s Blue chip TRBCX (with the 40+% disparity) is probably closer to a true growth fund.

Appreciate the added detail from @msf regarding the early days of PRFDX. BTW - having owned both funds, PRFDX (Price’s Equity Income fund) should not be conflated in style with OAKBX (Oakmark’s Equity and Income fund). The latter is a balanced fund with significant bond exposure. The former is not.

One point not to be missed is that the pandemic has favored tech-related companies over brick & mortar. And it’s clobbered the airlines and hospitality. I don’t know how car sales are running - but they’re likely suffering. Think of folks upgrading computers (video-conferencing) and their home entertainment systems. Personally, I’ve invested in a home projector / screen and joined a couple streaming services as one way to compensate for having to forgo visits to Broadway. Magnify that type of shift thousands of times over and you begin to see the impact. Amazon (one example) is profiteering from all of this as folks replace visits to retailers with online shopping.

Still, I think there’s more at work here. I’m thinking a lot of it is performance chasing and bidding up the hottest stocks and funds. But I’m not aware of any way to quantify that.

A closing thought: What would John Bogle say?

msf

Broadly speaking, value funds can be put into two different categories: absolute value and relative value. Absolute value funds look at individual stocks, estimate their intrinsic value (how much the company should be worth based on assets, projected earnings, etc.) and buys stocks of "undervalued" companies. Relative value funds look at individual stocks and rather than comparing them with an "absolute" sense of value, compare them to how the rest of the market is priced. They buy stocks of companies that are "relatively" cheap.

DSENX differs in two ways. First, it looks at entire sectors, not individual stocks. More importantly, it compares a given sector with its own prior valuations. It could look at a sector that is usually in the ionosphere (very high growth), note that it is now "merely" in the stratosphere, and thus a good "value". It's a different way of trying to buy low, sell high - where "low" means low relative to past pricing of the sector, as opposed to low relative to the current price of the market.

I wouldn't expect it to give one a lot of exposure to stocks that are cheap on an absolute basis (because it can buy high flying sectors), so in that sense it could satisfy your interest in not going all in on deep value. OTOH, I'm not sure how much it would lean toward value for the same reason. It's a slow motion market timing (sector rotation) fund that rotates based on a sector valuation standard. Might work in a market rotating toward value (in the traditional stock by stock sense), can't say. It could also rotate away from traditional value sectors as they appreciate (in a market move toward value).

Also, keep in mind that this is effectively a leveraged fund. For every dollar you invest, you get $1 worth of exposure to the underlying index plus $1 worth of exposure to the bond market. Works well if both are going up (or even if the bond portion is fairly flat).