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Research Affiliates founder heartened by value's brief, but blistering, run

Rob Arnott says it is too early to know if a vaccine will reverse value's fortunes, but argues that cheap stocks are priced for compelling returns.

Research Affiliates founder heartened by value's brief, but blistering, run

NEW YORK - This week’s resurgence of value stocks has not gone unnoticed by one of the factor’s biggest bulls, Research Affiliates founder Rob Arnott.

Arnott is among a number of managers who would benefit greatly from a prolonged spell of out-performance in value, and while encouraged by the two-day rebound, he remains cautious as to whether it marks a turning point in the decades-long trend of growth outperforming value. 

‘The results over the last few days have been quite encouraging,’ he wrote in a note to investors. 

Turning the tables

Over the first two days of this week, US value stocks beat their growth counterparts by more than 8%. On Monday alone, the Russell 1000 Value index outpaced the Russell 1000 Growth index by 6%, with value posting a 4.1% gain and growth posting a 1.8% loss.

Arnott noted that this was ‘the highest daily excess return over the past 10 years.’

The news of the Pfizer-BioNTech vaccine for Covid-19 showing 90% effectiveness in a trial might be the catalyst value has been waiting for. An emergence from lockdown is likely to boost sectors like travel and energy, and lessen reliance on online services, thus hurting technology and communication stocks. 

It’s also possible, the election of Joe Biden to the White House might mean the country restricts fracking, which could lead to higher energy prices, a further boon to value, Arnott noted. 

Catalyst

He said it was impossible to know what the catalyst might be for a reversal of the value/growth trend, but that the gap in valuations meant that even a small change could lead to extreme movements. 

‘Catalysts are, by definition, surprises,’ he wrote. ‘[But] when valuations are extreme, turns become inevitable, and a small shift in sentiment is often all it takes to initiate a swing of the pendulum from extreme fear to extreme euphoria.’

Whether a vaccine or energy policy prove to be the catalysts or not, he said that ‘value stocks are still priced to offer compelling return prospects, relative to their growth counterparts.’

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