How often has value outperformed growth in the first quarter of a year?

With value stocks in vogue, interactive investor looks back at the past 23 years.

• Best solution is to blend both value and growth, says ii

Value has outperformed growth in the first quarter of the calendar year 48% of the time in the last 23 years, according to new data* published today by interactive investor, the UK’s second-largest DIY investment platform.

ii’s findings are particularly pertinent within the context of the recent ‘Great Rotation’ in 2022, which has seen a decisive shift from growth companies into more traditional value stocks. In the current inflationary environment, and with interest rates continuing to rise, investors are less willing to pay-up for rapid growth – causing shares to de-rate.

But as the data shows, the outperformance of value stocks in the first quarter of the year is not necessarily new, even if the new environment that we now find ourselves in is. interactive investor looked at data going back some 23 years, right back to just after the launch of the MSCI World Growth and Value indices in December 1997.

For Lee Wild, Head of Equity Strategy, interactive investor, the last decade is particularly interesting: “The story for me is that value has underperformed growth in the first quarter of the calendar year 70% of the time in the past decade. Six of the seven years were by over 3%, demonstrating just how one-sided a bull market can be. But if you go further back, the story is far less clear cut.

“Significantly, the shift to value in Q1 2021 was the second-biggest outperformance in Q1 for any strategy in the past 25 years: 9.2%. Only the pandemic-driven rally was more one-sided (for growth at 12.6%). It was also the biggest Q1 outperformance for Value since 2011 when global stock markets had just experienced a rapid rally over the previous six months. Last year’s switch to Value was completely understandable given a spectacular rally from the Covid low had put popular tech stocks on sky-high valuations.”

Data: How often value has outperformed growth in the first quarter of a year?

Explaining the recent rotation to value, Richard Hunter, Head of Markets, interactive investor, says: “Rising Treasury yields in the US, and a more hawkish than expected stance from the Federal Reserve has prompted a bout of rotation from high growth stocks, such as technology, into value – therefore boosting financial and industrial shares.

“Interest rate-sensitive stocks, such as the banks, have attracted more buying interest ahead of the imminent fourth-quarter reporting season. Although it is extremely unlikely that rates will rise to historical levels, there is nonetheless an improvement in sentiment given that the impending environment should improve prospects for the banks over the coming months.”

What does this mean for big tech?

Richard Hunter, Head of Markets, interactive investor, explains: “With many of the larger tech companies trading at extremely high valuations given future growth prospects, these stocks are particularly sensitive to a rising interest rate environment. At the same time, interest rate should settle at a relatively low level by historical standards, which in turn could provide some future relief to the sector.

“In the meantime, the continuing threat of regulation overhangs the sector, and the stratospheric rise of many of the big tech names may also have provided an exit point for some investors to lock in profits.”

Is the rotation good news for the UK?

Richard Hunter, Head of Markets, interactive investor, adds: “The current bout of rotation has boosted the share prices of those sectors where rising interest rates and inflation can be of benefit to the business model, such as banks and energy stocks. In the UK, this has fed through to strong performances across these sectors in the first few days, and investors wishing to join the rotation trade could consider the longer-term potential benefits. In terms of market consensus, the current preferred plays in the bank sector are Barclays (LSE:BARC) and Lloyds Banking (LSE:LLOY), and in the energy sector, Shell (LSE:SHEL).”

Last week, ii published its January Best Buy data, which showed an increase in investor appetite towards the financial sector.

A reminder to diversify

Dzmitry Lipski, Head of Funds Research, interactive investor, explains: “While value stocks appear attractive today, it is likely that technology and environmental, social, and governance factors - aka ‘ESG’ factors - will continue to drive growth going forward. Because of this, investors should have diversified exposure to both growth and value styles in their portfolios.

“The quality growth strategies employed by the Fundsmith Equity and LF Lindsell Train UK Equity funds can be diversified by blending them with other value-oriented funds such as Artemis SmartGARP Global Equity and Jupiter UK Special Situations.

“With fund investing there are no guarantees, and even the fund managers get it wrong, so spreading your portfolio exposure over a range of different asset classes, regions and sectors is the best way to be diversified.

“You cannot control the risk the fund manager takes, but you can control risk and limit losses within your portfolio, through this diversification.”

*Data collected byinteractive investor using Morningstar