Value’s Rebound Rewarded Investors Who Stayed in Their Seats
Value’s recent turnaround has rewarded investors who remained disciplined following its prolonged slump. In addition to reminding us how quickly premiums can show up, the past few years reinforce an important factor in determining how much one should tilt toward higher expected returns: The upside is beneficial only if you can stay invested through the down times.
The Pendulum Swings
The three-year period ending in June 2020 was one of the worst ever for the US value premium, with the Russell 1000 Value Index (CAD) underperforming the Russell 1000 Growth Index (CAD) by 18.15 percentage points annualized. Since then, value has been mounting a comeback, beating growth by 7.91 percentage points annualized through June 2022.
Investors’ experience during these times depended, in part, on their degree of value emphasis. The more one deviates from the market along drivers of expected returns, the greater the tracking error relative to the market—but the greater the expected outperformance when targeted premiums are positive.
Two of Dimensional’s US marketwide strategies convey the range of outcomes for various levels of tilt (see Exhibit 1). During the value swoon from 2018 through 2020, the relatively lower-tilted DFA US Core Equity Fund Class F underperformed the Russell 3000 Index (Net of tax, CAD) by 5.20 percentage points per year. At the other end of the spectrum, US Vector Equity Fund Class F trailed the index by 13.32 percentage points.
The script has since flipped.1 Value’s rebound helped push Core to a over three-percentage-point advantage over the market in the two-year period ending in June 2022. On the other hand, Vector’s heavier tilt led to outperformance of six and a half percentage points.
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Annualized return difference (in percentage points) vs. Russell 3000 (Net of tax, CAD)
Performance data shown represents past performance and is no guarantee of future results. Current performance may be higher or lower than the performance shown. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. To obtain performance data current to the most recent month-end, visit dimensional.com.
Short-term performance results should be considered in connection with longer-term performance results.
Finding Balance with Your Tilts
It’s important for investors to balance their enthusiasm for higher expected returns with their tolerance for underperformance. Reining in one’s tilts toward the premiums following a period of underperformance—and consequently forfeiting a portion of the eventual rebound—could lead to an unfortunate scenario. Land on a tradeoff you can stick with and you may find April showers are followed by May flowers.
Glossary
Value Premium: The return difference between stocks with low relative prices (value) and stocks with high relative prices (growth).
Performance information as of 12/31/22. Expense information as of the prospectus dated 02/28/22. Performance data shown represents past performance and is no guarantee of future results. Current performance may be higher or lower than the performance shown. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. To obtain performance data current to the most recent month-end, visit dimensional.com.
Footnotes
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1Wes Crill, “Expectations vs. Reality in Value Funds” Insights (blog), Dimensional Fund Advisors, July 2022.
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2Performance information as of 6/30/22.
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Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.
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