A Value Fund That Doesn’t Respect the Style Box

Staking a permanent geographical claim to a part of the style box can be detrimental to a fund’s performance. Being geographically flexible, on the other hand, can be helpful. Recently, for example, avoiding energy exposure and gaining exposure to sectors normally found outside of the value managers’ typical habitats have been a boon for 27-month old value fund, DoubleLine Shiller Enhanced CAPE (DSEEX).

Before digging into this young fund and comparing it to its peers and relevant indices, it’s worth reviewing the recent history of value and growth indices. A value index isn’t always cheaper than, or poised to outperform, a growth index even for a decade. Value stocks may outperform growth stocks over multi-decade periods, as Fama and French showed, but they can lag for decade-long periods or more as well. And they can lag not because growth or glamor stocks are soaring manically, but because, somewhat counterintuitively, value stocks aren’t cheaper at all times.

Value isn’t always cheaper

A glance at the Russell 1000 Growth and Value Indices shows that growth beat value consistently for 10 years through the end of January 2016. That outperformance likely resulted from the fact that growth stocks became cheap in the aftermath of the technology bubble bursting.

Many so-called quality businesses, with consistently high returns on invested capital, such as brand-name consumer products companies like Coca Cola, Colgate and Procter & Gamble found themselves in the bargain bins for a few years after the 2000-2002 meltdown, and especially after the stock market meltdown of 2008. The same is true for large technology companies such as Microsoft, Intel, and Cisco. From roughly the end of the crisis up until recently, for example, Grantham, Mayo, van Oterloo, which uses the Shiller PE among other metrics, has asserted that “quality” stocks were the cheapest within the U.S. market.

However, those companies never made it into value indices because they remained steady, slow growers with consistently high profits and continued to be priced higher on one-year trailing multiples than financials or energy. As a result, these companies got cheap enough to outperform for the subsequent decade through January 2016. This shows one-year trailing multiples may not provide the best assessment of value.

Likewise consumer discretionary stocks had strong runs after getting smashed during the financial crisis. They bounced back on the support provided by access to new (mostly Asian) markets of wealthy consumers seeking luxury brand goods. While the world entered recession in 2008, wealthy people didn’t stop spending for long.

In contrast, traditional value stocks like financials that trade at typically low one-year trailing P/E ratios have had a difficult run owing to the financial crisis. And, most recently, energy and materials stocks, which are significant components of value indices and found in abundance in many value funds, have been terrible performers.

While nearly all commodities have dropped over the past few years, the decline in the price of oil has been particularly breathtaking.