My F&M

The Value Style

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Most investment management is in either the “value” or “growth” styles.  Value investing seeks stocks trading at less than “intrinsic value” (generally, value investors own stocks with lower price to earnings ratios than the market).  Growth investing seeks stocks with superior growth prospects, typically irrespective of concern for valuation. 

Our process is strictly neither value nor growth, combining elements of each: yield, growth, valuation, and quality. However, with two value components (P/E and dividend yield) and one growth component (long term estimated earnings growth), our process has much more in common with the value style.

That’s good because in the long run, value has outperformed both growth and the stock market as a whole.  As one measure, from its 1979 inception through 6/30/15, the Russell 1000 Value Index outperformed the market - in this case, the Russell 1000 Index - by 0.4% per year, and outperformed the Russell 1000 Growth index by 1.2 % per year.

But value doesn't outperform over all shorter periods. It underperformed significantly in the late 1990s and by lesser amounts in several other multi-year periods as well.  

We mention this because the Russell 1000 Value Index underperformed the S&P 500 Index by 2.1% per year over the two years ending 6/30/15. That trend accelerated in 2015 as the Russell 1000 Value Index lagged the S&P 500 by a whopping 4.7% this year through 6/30 (and it lagged the Russell 1000 Growth Index by over 9% this year as well).

This should  give you a better sense of the headwinds currently facing our investment process for stocks.  Such episodes have happened before and have always been resolved by a healthy “snap back” in relative performance of our stocks when markets turn.  The past two years are not unusual and do nothing to deter us from sticking with a process that stacks the odds in our favor to deliver superior long term results.