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By Phil Davidson, CFA - October 5, 2017
Value stocks have dramatically underperformed growth stocks over the last 10 years. Over this stretch, which includes its peak prior to the financial crisis in October 2007, the Russell 3000® Growth Index outperformed the Russell 3000® Value Index by an astonishing 3.23 percent annualized.1 The spread between growth and value was driven by a confluence of unprecedented circumstances in the financials and energy sectors. More recently, the FANG stocks (Facebook, Amazon, Netflix, and Google; sometimes known as FAANG, when Apple is included) made outsized contributions to market returns.
Financials, which are more heavily weighted in value indices, were decimated by the financial crisis of 2007-2008. In addition to a few high-profile failures, many large financial companies had to be recapitalized. This resulted in reduced earnings and dividend-paying ability. Low short-term interest rates and more stringent regulation have continued to weigh on the sector’s profitability.
More recently, the energy sector, also more heavily weighted in value indices, dramatically underperformed due to the collapse in oil and natural gas prices. Oil declined from $115 per barrel in June 2014 to below $30 in early 2016 and natural gas prices fell from $4.40 per thousand cubic feet in early 2014 to $1.71 in March of 2016.2 The sector suffered from the significant pressure on earnings and cash flows, and many of the more leveraged companies had to reduce or eliminate their dividends.
As a result of these events, dividends for the Russell 3000 Value Index struggled to return to levels attained before the Great Recession and have increased by only 32 percent on a cumulative basis during the last 10 years. Conversely, dividends for the Russell 3000 Growth Index continued to increase through the recession, growing a cumulative 154 percent during the same period.1 This is reflected in notable changes in the top dividend-payers list from 2007 to 2017. Apple, a leader the growth-oriented technology sector emerged as the number one dividend payer. Meanwhile, previous top five dividend payers, Citigroup and Bank of America, had to be bailed out by the government and currently do not crack the top ten.2
Dividends are a crucial element of equity total returns and have accounted for almost 41 percent of the S&P 500’s total return over the last 90 years.1 We believe active managers can identify mispriced, dividend-paying stocks of otherwise strong companies. This may offer investors the potential to earn income while they wait for valuations to rebound, a time-tested way to accumulate wealth.
In summary, we believe investing in high-quality businesses selling at a discount to fair value will continue to generate attractive risk-adjusted returns over time. Sticking to our approach is especially important during market extremes where valuations appear stretched and value style investing has temporarily fallen out of favor.
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2Source: New York Mercantile Exchange.
References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.