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Retaining value in your stock portfolio

Despite having trailed the performance of the broader stock market, value-oriented funds still play a key role in investment portfolios. Marc Amateis explains how value stocks can help balance investments for the inevitable end of the business cycle. He also suggests a strategy for making them more effective. Marc spoke with Joel Dresang. A transcript of their discussion follows.

Joel Dresang: Marc, I want to talk with you about value-oriented stock mutual funds. So, for a long time now, it seems that value has been trailing the performance of growth and the broader stock market. What’s going on?

Marc Amateis: Well, Joel, usually value stocks lead coming out of a recession, but this expansion in our economy has been going on for a long time. We’re going on 10 years now. That’s an awfully long time. And as a result, the latter stage of the expansion has been extended, so growth stocks have had a long time to do very well, and they have.

Joel: So, value stocks typically have lower P/E (price-earnings) ratios; they’ve got lower volatility; they’re more likely to pay dividends; and they do better at the beginning of an expansion?

Marc: Right. That’s correct, Joel. At the beginning of an expansion, you’re getting growth out of the economic expansion itself. Everything is rising. Money is becoming more available, so you don’t need to get growth at the corporate level. Later in the business cycle, as the economy kind of slows down, now you need to get growth at the corporate level, and that’s where growth stocks take over.

Joel: So, if we’re in a phase of the business cycle that favors growth, explain why we still want value in our portfolio.

Marc: Well, number one, you want a broad mix of stocks for diversification. That’s how you control risk, but also value stocks are lower volatility, what we call lower beta, and when things turn south, when the inevitable correction or downturn occurs, those are the stocks that are going to really hold up the best.

I’ll give you an example: during the Great Recession, ’07 to ’09, the S&P 500 fell over 50%. A company like Walmart, classic value stock, actually did well, made money. Wisconsin Energy lost only about a third of what the S&P 500 did. So, those are the kinds of stocks that are really going to hold you up when things get tough.

Joel: Are there any certain strategies to have for value at this point in the game?

Marc: Well, it used to be that passive indexing in the large cap value space did very well. There wasn’t a lot of need for active management, but that has changed. In 2017, 75% of the active value managers actually outperformed their benchmarks, and that’s because stock valuations have pretty much been fully realized.

So, with the later stages of the economic expansion, stock picking has really become important, even in large cap value.

Joel:  So, active managers have more flexibility as to what’s in their funds. Is there still a role for passive indexing?

Marc: There is a role for passive indexing, but I would say it’s broadly across all types of stocks, just to get very low cost exposure. The lines are blurring somewhat between growth and value as stocks have become more fully valued, and so you want those active managers to have the ability to go outside the lines a little bit and do the proper stock picking to improve performance.

Joel: Just to recap, using active management can help in value funds at this point in the business cycle, but it’s still important to have value, even though it hasn’t been performing as well as growth.

Marc: Joel, if everything that you own is going up at the same rate, what it probably means is you’re not properly diversified, and diversification is how you control risk. You want to make sure that you’ve got all your bases covered so when you have the inevitable downturn, you’ve got some protection in your portfolio.

Marc Amateis is a vice president and investment advisor at Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
Money Talk Video by Jason Scuglik and Peter May

Learn more
The case for active funds amid volatility, a Money Talk Video with Kyle Tetting
Value & Growth: Going Deeper, a Money Talk Video with Brian Kilb and Marc Amateis
Investors and the business cycle, a Money Talk Video with Dave Sandstrom
Balancing value and growth, a Money Talk Video with Brian Kilb
Types of stock, from the Financial Industry Regulatory Authority
(initially posted June 28, 2018)

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