Its always darkest before the dawn, the saying goes. For U.S. value equity managers, it may get darker still before sunlight peaks through.
U.S. large-cap value stocks lost 16.1% in the 12-month period ended July 31, according the Russell 1000 Value index, compared with -7.6% for domestic large-cap growth stocks, according to the Russell 1000 Growth index.
It could get worse before it gets better. The next few quarters could be particularly rough for value stocks, particularly banks and other financial organizations, said Ed Clissord, senior global analyst for Ned Davis Research in Venice, Fla. Financials comprise 27.2% of the Russell 1000 Value index.
The hangover from the decline in the housing market will take a while to fix itself because so much is tied into housing prices, he said. Its going to be hard for banks to recover from the significant losses they are having.
Mr. Clissord said his firm, which advises money managers, prefers growth over value stocks. In todays environment, it is recommending underweighting financials and overweighting companies that produce consumer staples or utilities that can pass along increases in energy costs to consumers.
Jeb Doggett, a partner with Casey Quirk & Associates LLC, Darien, Conn., an adviser to money managers, agreed. Its unlikely that financials are going to perform well in the near future, said There is an overhang with financials related to subprime, he said.
Money managers and consultants to institutional investors arent writing off financials for the long term. The debate is about how long a recovery will take. There is a huge amount of disagreement (in the) mortgage-related space, Fannie Mae, Freddie Mac and other financials, said Dennis Jensen, a portfolio manager for Russell Investments.
Even managers that are not buying financials agree these stocks are cheap, he said. Managers think they will rally but are unsure when. They dont want to take the risk between now and then because they dont know how to figure out which ones have hidden bombs.