Standing Alone Against the Crowd: Abandon Value? Now?!?

Key Points

  • In a prolonged anti-value momentum-driven rally, it’s easy and natural to forget the long-term value proposition of a rebalancing discipline.
  • The evidence and intuition underlying a contrarian value investing discipline has proven merit in cycle after cycle across history.
  • By steadily rebalancing against the market’s most extravagant bets, RAFI strategies are positioned to recoup accumulated shortfall at the cycle’s turn, delivering meaningful long-term value-add.
  • The continued outperformance of today’s most dominant companies is unlikely to be sustainable in the long run.

The current value–growth cycle has been particularly daunting for anyone with a value orientation. Value has been out of favor for approximately 12 years at this point. In this prolonged phase of growth dominance, the patience of investors in RAFI™ and other value-tilted strategies is naturally tested. How do we retain confidence in the disciplined rebalancing strategy that characterizes RAFI? In this paper, we examine the data underlying this extreme and—we believe—unsustainable growth-dominated market. And we review why our conviction in contrarian rebalancing is actually stronger than ever, reinforced by some nuances of this surge in growth stocks.

“It’s easy to stand with the crowd. It takes courage to stand alone.”
Mahatma Gandhi

Since the 1957 launch of capitalization-weighted indices, critics of these indices have pointed out it makes no sense to put more money into a company just because the company is expensive—that is, all else equal, if a company’s valuation multiple doubles, the cap index’s exposure to that stock doubles. Yet for a half-century, academe has taught investors a finance theory orthodoxy anchored on the concept of efficient markets, which requires us to view the world of investments from a cap-weight-centric perspective. From this one-dimensional viewpoint, the cap-weighted market is the “neutral” starting point and any departures are “active bets” that require a healthy dose of insight and/or hubris. While mainstream academics have slowly, but significantly, strayed from a strict efficient markets stance, the prevailing narrative continues to promote a cap-weight-centric view of the markets.