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Will Value Investing Come Back?

Ben Johnson, CFA

Ben Johnson: Hi, I'm Ben Johnson, director of global ETF research with Morningstar. I'm coming to you from the sidelines of the 2019 Morningstar Investment Conference. Where I had the opportunity to speak with Holly Framsted, who's the head of factor ETFs for BlackRock iShares.

Holly and I had the opportunity to discuss the value factor, specifically what's been troubling it in recent history, and what investors can expect for the future of this factor.

Holly Framsted: I think it makes sense to first talk about when value strategies should work best. Value strategies tend to work best coming out of an economic trough. So as the economy expands, these companies with greater operating leverage tend to capture that upswing in the economy far more effectively. As the economy heads toward more stable and steady prolonged growth, then value tends to take a backstage to momentum. And as we head toward a slowdown and a contraction, more-defensive strategies like quality and minimum volatility tend to shine.

So we've been in a prolonged period of economic growth, particularly a time which tends to favor momentum. And that economic growth has been sustained and even extended in many ways through quantitative easing. We believe that we're in now a period of slowdown which should by normal cyclical standards head toward a contraction at some point. And so while value has not been favored in the most recent regime, we do believe it will come back as the economy rebounds off the low.

I think it's really important to understand the economic intuition behind why you are investing in a strategy in the first place. Value companies tend to have a lot of operating leverage, and that cyclicality that we just talked about in their performance is a risk that not all investors are willing to bear. So unless you expect that all investors will suddenly be able to bear a prolonged drawdown--which arguably they can't, that's why we're talking about it--then you would expect that value premium to persist moving forward. Because not all companies will all of a sudden become flexible enough to be worth a premium over time.

I also think it's important not to throw the baby out with the bath water. Value has been underperforming, but all factors are cyclical. And so a portfolio that balances across factor exposures including value but also including quality and momentum as examples can help deliver more consistent performance throughout the course of the cycle.