Value In Name Only

It’s time to recognize that the value index isn’t really a value index anymore. 

To say things have been tough for value investors does not quite capture the carnage. Even Standard & Poor's appears to be giving up on the beleaguered style and is stuffing their value index with growth stocks. For example, the top three stocks in their Value Portfolio are classic growth stocks: Apple, Microsoft, and Amazon. In fact, over 17% of the portfolio comprises AAPL, MSFT, and AMZN, whose average price-to-sales ratio is an astonishingly high 8.8x, hardly adhering to a value metric.

Growth stocks have pushed the limits in terms of valuation, and the ratio of the S&P 500 Value Portfolio relative to the price of the S&P Growth Portfolio is approaching the 20-year lows hit in November 2021. That month marked the top of the massive NASDAQ rally off the March 2020 lows. From November 2021 to January 2023, the S&P 500 Value ETF outperformed the S&P 500 Growth Index ETF by over 40%.

Unfortunately, with the value index at its current composition, if we see a similar type of reversal, the same performance is unlikely to follow. However, with Pave Pro’s factor tilt functionality, advisors can take advantage of modern value investing that stays true to the style without compromising performance.

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Pave Pro’s factor tilts allow for a market-reactive implementation of value-style investing. Pave’s technology monitors the market and waits for the right moment to dial up or dial down a certain style. For example, in our current market conditions, Pave Pro will keep a healthy growth allocation in a value tilted portfolio until the market turns in favor of value stocks. At that point, Pave Pro will readjust the portfolio to take advantage of tailwinds.

On top of its performance benefits, this functionality is easy for advisors to take advantage of. In Investment Preferences, click on the Factor Tilt section and select Value in the dropdown for Investment Style. After that, save the changes, and Pave Pro will generate your new value portfolio. Pave Pro also automates all ongoing updates and trading so your portfolio will react to changing market conditions without you needing to lift a finger.

Something to Consider: Pave Pro also allows you to add another dimension to your investments for clients seeking value stocks. When you construct a portfolio, you can choose the Russell 2000 benchmark, which allows you to take advantage of any outperformance in small caps, and then select a Value tilt. 

Just remember that this is a compound trading strategy. Because both value and small caps have lagged, it could translate into a windfall if value stocks snap back along with small caps. However, if small caps continue to underperform, it could take away from any potential outperformance on the value bet.

To learn more about Pave, please reach out by emailing sales@pavefinance.com or pressing the button below. We look forward to speaking with you.

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1. Testimonial provided on May 15th, 2024, by an Independent Investment Adviser with $500+ million in AUM. They are an incoming client of Pave Finance, Inc. No compensation was provided in exchange for this testimonial.

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