Infographics
Rising Rates: Why Value Stocks Have Outperformed
This infographic is available as a poster.
This infographic is available as a poster.
The Benefits of Value Stocks in Rising Rate Environments
As investors flock to safety, value stocks have outperformed growth stocks year-to-date amid economic turbulence and rising interest rates.
Owing to their strong fundamentals and cash flows, value stocks may be returning into favor.
In this infographic from New York Life Investments, we illustrate why value stocks offer opportunities in rising rate periods.
Recent Performance
In a matter of two years, the Ukraine war, supply chain shocks, and COVID-19 have led inflation to multi-decade highs.
Amid these complex struggles, value stocks have outperformed significantly.
- Russell 1000 Value Index: -1.1%
- Russell 1000 Growth Index: -14.1%
- S&P 500: -8.4%
As of April 14, 2022
With higher inflation predicted for the medium term, value stocks may be staging a comeback.
As investors look to de-risk their portfolios, many are turning to value stocks, thanks in part to their historical outperformance during inflationary and rising rate periods.
Value vs. Growth: Key Characteristics
As a quick refresher, here are the key distinctions between value stocks and growth stocks.
| Characteristic | Value Investing | Growth Investing |
|---|---|---|
| Defining Features | Companies with stronger cash flows, steady income, priced below intrinsic value. | Companies with lower cash flows, low (if any) income, strong earnings growth potential. |
| Valuation | Undervalued (low P/E ratios) | Overvalued (high P/E ratios) |
| Dividends | More common | Less common |
| Volatility | Lower | Higher |
| Sectors | Financials, Energy, Healthcare, Industrials | Tech, Communications, Consumer Discretionary |
Cyclical sectors such as financials and energy often benefit when prices increase after an economic contraction.
Since companies earn money in different ways, it is often useful to compare price-to-earning (P/E) ratios within a sector. A P/E ratio is a metric for valuing a company, where a company’s stock price is divided by its earnings per share.
An overvalued company in the tech sector may have a P/E ratio of 100, while the S&P sector average is 24. By contrast, an undervalued healthcare company may have a P/E ratio of 14, lower than the S&P sector average of 16.
When a company is undervalued it means that it’s trading below its intrinsic value.
Value vs. Growth: Performance
Looking back, the previous decade saw the worst performance for value in the last 90 years.
On average, growth outperformed value by 7.8% annually since 2010. However, looking at 10-year periods, value has outperformed growth over every decade since the 1940s.
| Decade | Value Outperformance |
|---|---|
| 1930s | -0.5% |
| 1940s | 10.8% |
| 1950s | 5.6% |
| 1960s | 4.2% |
| 1970s | 8.1% |
| 1980s | 7.4% |
| 1990s | 0.7% |
| 2000s | 8.0% |
| 2010s | -2.6% |
Average annual performance of Fama and French (“HML”) value factor by decade.
Source: Fama & French via Mercer (Mar 2021)
Now, against economic uncertainty and other structural shifts, the growth and value divergence is beginning to change for the first time in over a decade.
What is Driving Value Stocks?
On a broader level, the following forces have driven outperformance in value stocks and growth stocks.
| Value Investing | Growth Investing | |
|---|---|---|
Broad Market Factors |
|
So how do these apply today?
In an inflationary (and rising rate) period, current earnings become more valuable and future earnings become less valuable. Typically, “value stocks” are assessed based on their current earnings while “growth stocks” are valued on their future earnings.
Consequently, inflationary periods have tended to favor value stocks and deflationary periods have tended to favor growth stocks. When prices are climbing, companies with actual earnings are potentially better positioned to increase prices and retain profit margins.
At the same time, it is important for investors to avoid value-traps, which are companies trading below value that are in financial duress. To help mitigate this challenge, active investment managers can help identify the appropriate companies.
Sign of the Times
It’s worth noting that this isn’t about value vs. growth. Instead, different styles have performed better at different times. Of course, it’s important for investors to consider a number of variables for their portfolios:
- Investment Objectives
- Time Horizons
- Volatility
- ESG Objectives
With these in mind, investors can implement the best strategies to help achieve their goals.
Infographics
A New Framework for Personalized Financial Portfolio Alignment
The MSCI Similarity Score compares a client’s financial portfolio to a model portfolio based on risk exposures, allowing for personalization.
A New Framework for Personalized Financial Portfolio Alignment
There’s a tension between clients’ need for personalization and the one-size-fits-all approach of model portfolios. Traditionally, wealth management firms check financial portfolio alignment based on exact holdings. However, some level of mismatch with a model portfolio is inevitable due to client preferences and circumstances.
How can advisors meet the personalization needs of their clients at scale?
This graphic, created in partnership with MSCI Wealth, highlights a new framework called the MSCI Similarity Score that allows for customization.
Introducing the MSCI Similarity Score
With the MSCI Similarity Score, firms can assess financial portfolio alignment in a simple, single score. A score of 0 indicates no alignment, while a score of 100 indicates full alignment.
The score measures how similarly a client portfolio behaves compared to a firm’s model portfolio based on various factors. For equity, this includes things like the country and industry of a company, as well as the strategies used, such as targeting growth stocks. For instance, two U.S. technology growth stocks may behave similarly in response to market movements.
This approach allows for more flexibility to meet clients’ unique goals and risk appetites. It’s a similar idea to someone counting calories, rather than restricting their diet to specific foods.
Seeing the Score in Action
How does the MSCI Similarity Score work in practice? Consider a hypothetical U.S. client that an advisor is onboarding.
The advisor has assigned the client to a high-quality global equity model portfolio, and is checking alignment.
| Name | Model Allocation | Client Allocation | Difference |
|---|---|---|---|
| Core Total US Stock Market ETF | -- | 30% | -30% |
| MSCI USA Quality Factor ETF | -- | 10% | -10% |
| Total Stock Market ETF | 40% | -- | 40% |
| Core MSCI EAFE ETF | -- | 8% | -8% |
| MSCI Emerging Markets ETF | -- | 4% | -4% |
| MSCI INTL Quality Factor ETF | -- | 3% | -3% |
| MSCI ACWI ex-US ETF | 20% | -- | 20% |
| 7-10 Year Treasury Bond ETF | -- | 15% | -15% |
| Corporate Bond ETF | -- | 8% | -8% |
| 1-3 Year Treasury Bond ETF | -- | 3% | -3% |
| Core US Aggregate Bond ETF | 30% | -- | 30% |
| Private Equity Fund | -- | 10% | -10% |
| Corporate Lending Fund | 5% | 10% | -5% |
| Gold ETF | 5% | -- | 5% |
Specific funds and ETFs are for illustration only and do not constitute recommendations.
The client’s holdings are quite different from those of the model portfolio.
However, using the MSCI Similarity Score, the advisor compares the two portfolios on the factors driving their performance.
MSCI Similarity Score Breakdown
Starting from a perfect score of 100, each difference in risk exposure between the client’s portfolio and the model portfolio reduces the score.
| Risk Factor | Score |
|---|---|
| Starting Point: Perfect Alignment | 100.0% |
| Global Equity | -7.5% |
| Commodities | -4.9% |
| US Private Equity | -2.3% |
| U.S. Equity | -1.9% |
| USD Rates Level | -0.4% |
| Final Similarity Score | 83.0% |
The biggest difference between the two portfolios is their exposure to global equity risk.
With a strong Similarity Score of 83.0%, the advisor can see that the drivers of risk for both portfolios are closely aligned despite holding different funds.
A Flexible Approach to Financial Portfolio Alignment
The MSCI Similarity Score helps wealth management firms assess alignment between a client portfolio and model portfolio based on their behavior, rather than exact holdings.
This approach has a number of benefits.
- Personalization: Wealth managers can customize client solutions without sacrificing portfolio alignment.
- Transparency: Clients can see how their financial portfolio aligns with the firm’s recommendation, building their confidence in their investments.
- Scalability: Firms can quickly see the score across multiple portfolios, helping them manage thousands of clients efficiently.
As client needs evolve, the MSCI Similarity Score is a simple and innovative way to customize financial portfolio alignment.
Learn more about the MSCI Similarity Score.
Infographics
The 20 Most Common Investment Mistakes, in One Chart
Here are the top investment mistakes to avoid, from emotionally driven investing to paying too much in fees.
The 20 Most Common Investment Mistakes
No one is immune to errors, including the best investors in the world.
Fortunately, investment mistakes can provide valuable lessons over time, providing investors an opportunity to gain insights on investing—and build more resilient portfolios.
This graphic shows the top 20 mistakes to watch out for, according to the CFA Institute.
20 Investment Mistakes to Avoid
From emotionally driven investment decisions to paying too much on fees, here are some mistakes that investors commonly make:
| Top 20 Mistakes | Description |
|---|---|
| 1. Expecting Too Much | Having reasonable return expectations helps investors keep a long-term view without reacting emotionally. |
| 2. No Investment Goals | Often investors focus on short-term returns or the latest investment craze instead of their long-term investment goals. |
| 3. Not Diversifying | Diversifying prevents a single stock from drastically impacting the value of your portfolio. |
| 4. Focusing on the Short Term | It’s easy to focus on the short term, but this can make investors second-guess their original strategy and make careless decisions. |
| 5. Buying High and Selling Low | Investor behavior during market swings often hinders overall performance. |
| 6. Trading Too Much | One study shows that the most active traders underperformed the U.S. stock market by 6.5% on average annually. Source: The Journal of Finance |
| 7. Paying Too Much in Fees | Fees can meaningfully impact your overall investment performance, especially over the long run. |
| 8. Focusing Too Much on Taxes | While tax-loss harvesting can boost returns, making a decision solely based on its tax consequences may not always be merited. |
| 9. Not Reviewing Investments Regularly | Review your portfolio quarterly or annually to make sure you’re staying on track or if your portfolio is in need of rebalancing. |
| 10. Misunderstanding Risk | Too much risk can take you out of your comfort zone, but too little risk may result in lower returns that do not reach your financial goals. Recognize the right balance for your personal situation. |
| 11. Not Knowing Your Performance | Often, investors don’t actually know the performance of their investments. Review your returns to track if you are meeting your investment goals factoring in fees and inflation. |
| 12. Reacting to the Media | Negative news in the short-term can trigger fear, but remember to focus on the long run. |
| 13. Forgetting About Inflation | Historically, inflation has averaged 4% annually. Value of $100 at 4% Annual Inflation After 1 Year: $96 After 20 Years: $44 |
| 14. Trying to Time the Market | Market timing is extremely hard. Staying in the market can generate much higher returns versus trying to time the market perfectly. |
| 15. Not Doing Due Diligence | Check the credentials of your advisor through sites like BrokerCheck, which shows their employment history and complaints. |
| 16. Working With the Wrong Advisor | Taking the time to find the right advisor is worth it. Vet your advisor carefully to ensure your goals are aligned. |
| 17. Investing With Emotions | Although it can be challenging, remember to stay rational during market fluctuations. |
| 18. Chasing Yield | High-yielding investments often carry the highest risk. Carefully assess your risk profile before investing in these types of assets. |
| 19. Neglecting to Start | Consider two people investing $200 monthly assuming a 7% annual rate of return until the age of 65. If one person started at age 25, their end portfolio would be $520K, but if the other started at 35 it would total about $245K. |
| 20. Not Controlling What You Can | While no one can predict the market, investors can control small contributions over time, which can have powerful outcomes. |
For instance, not properly diversifying can expose you to higher risk. Holding one concentrated position can drastically impact the value of your portfolio when prices fluctuate.
In fact, one study shows that the optimal diversification for a large-cap portfolio is holding 15 stocks. In this way, it helps capture the highest possible return relative to risk. When it came to a small-cap portfolio, the number of stocks rose to 26 for optimal risk reduction.
It’s worth noting that one size does not fit all, and seeking financial advice can help you find the right balance based on your financial goals.
Another common mistake is trading too much. Since each trade can rake up fees, this can impact your overall portfolio performance. A separate study showed that the most active traders saw the worst returns, underperforming the U.S. stock market by 6.5% on average annually.
Finally, it’s important to carefully monitor your investments regularly as market conditions change, factoring in fees and inflation. This will let you know if your investments are on track, or if you need to adjust based on changing personal circumstances or other factors.
Controlling What You Can
To help avoid these mistakes, investors can remember to stay rational and focus on their long-term goals. Building a solid portfolio often involves assessing the following factors:
- Financial goals
- Current income
- Spending habits
- Market environment
- Expected returns
With these factors in mind, investors can avoid focusing on short-term market swings, and control what they can. Making small investments over the long run can have powerful effects, with the potential to accumulate significant wealth simply by investing consistently over time.
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