Value investors, the true pessimists of the investment world, are struggling to find contrarian views in the more than six-year bull market.
But with the Federal Reserve poised to finally raise interest rates later this year, they're hoping their period of underperformance will soon come to an end.
They say the first rate hike — be it in September, October or December — could mark the bottom of the cycle, correcting overblown valuations and, they hope, triggering a return to an investment style that focuses on finding shares trading for less than their intrinsic values.
“When interest rates rise, value tends to outperform,” said Dylan Ball, Edinburgh-based executive vice president and portfolio manager for Franklin Templeton Investments' global equity group. The money manager has $866.5 billion of assets under management.
“When interest rates fall, then the value index underperforms. There is some correlation going on here between bond yields and value performance,” he said.
Since 1995 (the inception of the value index), the correlation between monthly returns of the Russell 3000 Value index and moves in 10-year U.S. Treasury yields was 0.3; compared to 0.24 with the Russell 3000 index over the same period.
Other money managers agreed, including Laurence Bensafi, London-based deputy head, emerging markets equities, at RBC Global Asset Management. “We think (the interest rate hike) could be one of the turning points. That in the past has been a point (of change) — people are worried about the Fed moves, and then realize it is not the end of the world, and the economy improves,” she said.
RBC GAM has C$370 billion ($283.5 billion) in AUM.