Capitalización de mercado: Grande / Pequeña

Highlights BCA still sees green shoots: Our latest view meeting reinforced BCA strategists’ optimistic global outlook, and we are methodically adding international and cyclical exposures to reflect it. Relatively modest M&A activity is not a sign of a top, … : Last Monday was the busiest Merger Monday of the year, but relative merger volumes are not anywhere near the peaks that coincided with the end of the last two expansions. … and neither is small-cap equity underperformance: There is no empirical basis for concluding that small-cap underperformance heralds economic weakness, stock market weakness or heightened risk aversion. Feature Onward. At our latest editorial view meeting, held last week, we completed the step we first began discussing in the spring, upgrading Eurozone equities to overweight in global equity portfolios. BCA continues to recommend investors remain underweight sovereign bonds in balanced and dedicated fixed income portfolios, and we expect that a top in the dollar versus the more cyclical major currencies is coming soon. We downgraded US equities to underweight to make room for the Eurozone overweight, along with new overweights in British and Japanese equities. The move reflects the BCA consensus that global growth has bottomed and is poised to accelerate. Against an improved growth backdrop, the dollar should cede leadership to more cyclically sensitive currencies, providing non-US equities with a relative tailwind.1 The narrowing of the growth differential between the US and the rest of the world should give international equities an additional boost. A revived growth outlook, and a cooling of trade tensions signaled by a signed Phase 1 China-US agreement, would ease some of the safe-haven demand for sovereign bonds, and help interest rates unwind some of the downward pull that dragged them lower across the first eight months of the year. The US equity downgrade is only a relative call, however; US Investment Strategy remains constructive on the absolute return outlook for US stocks. Other economies with a greater reliance on trade will benefit more from a global upswing than the US, which suffered less from the global slowdown than its peers. The S&P 500 has much more exposure to the rest of the world than the US economy, though, and its earnings would get a boost from accelerating global growth and a weaker dollar. At the same time that the fundamental picture is poised to improve, the wall of worry continues to renew itself, and this week we discuss concerns about M&A activity and small-cap stocks’ underperformance, which have come to the fore as Sino-American tensions have relaxed their grip on the collective investor psyche. Mergers And Animal Spirits Mergers and acquisitions (M&A) generated some attention-getting headlines last month. Just last Monday, nearly $60 billion of deals were struck: Charles Schwab purchased TD Ameritrade for $26 billion, LVMH bought jewelry icon Tiffany for $18 billion, Novartis paid nearly $10 billion for drugmaker Medicines Company, and Ebay sold StubHub for $4 billion. Earlier last month, Xerox launched a hostile bid for HP ($32 billion), and KKR reportedly discussed an acquisition of Walgreens that could top $70 billion. A Walgreens transaction is a long shot, as it would potentially be the largest leveraged buyout of all time, but it has set tongues wagging in investment banking and private equity circles and fingers wagging among observers with an inclination to be scolds. M&A overtures cannot be viewed as a pure proxy for animal spirits, but M&A activity has aligned closely with the business cycle over the past two full cycles. The value of completed transactions as a share of equity values and GDP has troughed soon after the recession ends and peaked just before the recession begins, both here and abroad (Chart 1). In early 2016, proportional M&A volumes approached the levels that marked a top in 2000 and 2007, but the signal turned out to be a head fake, at least in terms of the US business cycle. Today’s volumes do not appear to be a concern, especially when compared to equity market value, which has consistently outpaced M&A activity since the 2016 peaks. Chart 1Peaks In M&A Activity Coincide With Business Cycle Peaks, ... It makes intuitive sense that peaks and troughs, or surges and slowdowns, in M&A might provide some insight into corporate confidence. Insight into confidence might in turn offer a preview of capex and hiring activity. Chart 2... But M&A Isn't Predictive Otherwise The empirical record does not support the intuition, however, as non-residential fixed investment growth has not shown much of a relationship with M&A volume as a share of GDP (Chart 2, top panel). Since the crisis, M&A volume has oscillated around the steady climb in hiring intentions (Chart 2, middle panel) and job openings (Chart 2, bottom panel) without exhibiting a clear relationship. What Is Small-Cap Performance Saying? The S&P 500 has made thirteen new all-time highs, or about one every other day, since the last week of October. The S&P SmallCap 600, on the other hand, just narrowly topped its year-to-date high, and remains more than 9% from its all-time high, set at the end of August 2018. Small-caps are more volatile than large-caps and many investors treat relative small-cap performance as a proxy for overall risk aversion. When small-caps are outperforming, investors are presumed to be more willing to embrace risk; when they’re underperforming, investors are supposedly more prone to shun it, with implications for all equities. Small-cap indices are simply too jumpy to predict large-cap equity moves. The empirical record does not support the view that relative small-cap underperformance leads broader market downturns. Because small-cap market cycles tend to be more compressed than large-cap market cycles, there are many more of them. There have been seven complete S&P 500 market cycles since 1970 (Table 1), versus fifteen complete market cycles for the equal-weighted all-cap Value Line Index2 (Table 2). Simple logic holds that all fifteen small-cap events can’t be portents of seven large-cap events, and the S&P 500 has been largely indifferent to small-cap outperformance and underperformance over time (Chart 3). Table 1The S&P 500 Is On Its Eighth Bull Market Since 1970 … Table 2… While The Value Line Index Is On Its Sixteenth Chart 3Independent Events We do not believe that small-cap relative performance is a reliable indicator of investor risk tolerance/aversion, or a proxy for animal spirits. We have found that relative performance is best explained by more prosaic elements like sector composition, valuation and earnings discrepancies, domestic/global performance shifts and cyclical/defensive performance shifts. These elements have sent mixed signals as group so far this year, but sector composition is likely to support small-caps going forward if our constructive economic view pans out. Relative small-cap performance doesn't tell us anything about the S&P 500's future direction. Compositional Factors: The S&P SmallCap 600 Index is not just a mini-me version of the S&P 500 because the benchmarks’ sector composition often varies considerably. The SmallCap 600 currently has much heavier weightings than the S&P 500 in Industrials, Financials, Consumer Discretionaries and Real Estate, and much lighter weightings in Technology, Communication Services and Consumer Staples stocks (Table 3). The small-cap index has a greater share of early cyclicals than the S&P 500, and an equivalently smaller share of defensives, but that hasn’t mattered this year, as small-caps have underperformed large-caps in every sector but Health Care (Table 4). Small-cap underperformance in Energy, Communication Services, Staples, and Financials has been especially stark. Table 3Not Quite Apples To Apples Table 4Year-To-Date Sector Performance Valuation/Earnings Discrepancies: Disparities in index valuation may bear on small- and large-cap performance without revealing anything about underlying business or economic trends, or without providing much insight into investors’ broader appetites for risk. Relative valuation does not appear to have been much of a factor for small- and mid-cap stocks’ relative performance this year, as standardized relative multiples have stayed close to the mean (Chart 4). Both of the SMID indexes have experienced relative de-rating this year, but their underperformance is better explained by lagging earnings growth. According to Refinitiv/I/B/E/S, MidCap 400 and SmallCap 600 earnings are expected to decline by 7% and 19%, respectively, versus the S&P 500’s modest 1% contraction. Chart 4Relative Valuations Are In Line Domestic/Global Discrepancies: Smaller companies are less likely to derive significant portions of earnings and revenues from overseas, and multinationals tend to be mega-caps. The formerly decent correlation between small-cap relative performance and domestic-versus-global industry group performance has unraveled since the 2016 presidential election (Chart 5, bottom panel). It’s possible that investors bid too eagerly for small-caps on expected policy changes after the election and in early 2018, following the cut in the top marginal corporate income tax rate that stood to disproportionately benefit small-caps with effective tax rates equivalent to the top marginal rate.3 It is much easier to buy a small-cap index ETF than it is to assemble portfolios of domestically- and globally-exposed industry groups, which may explain why small-caps decoupled from domestic-versus-global industry groups in two pronounced spikes. A continued small-cap slide would be consistent with BCA’s sanguine global view. Small-caps' relative performance has decoupled from global-facing stocks' relative performance. Could tariffs be hurting them more than expected? Chart 5Small Caps May Not Be Immune To Global Pressures After All Cyclical/Defensive Discrepancies: Differences in exposure to cyclical and defensive sectors offer another perspective on differences in sector composition. The SmallCap 600 Index has just 60% of the S&P 500’s exposure to defensive sectors. Absolute small-cap performance has moved with cyclical-to-defensive performance this year (Chart 6, top panel), but the relative breakdown in small-cap performance that began when defensives took the lead failed to reverse when cyclicals recently revived (Chart 6, bottom panel). We expect cyclicals to outperform defensives in line with our constructive view on global growth, which should translate to a boost for relative small-cap performance. Chart 6Cyclicals Investment Implications The conventional wisdom that small-cap underperformance signals a broader equity downturn does not hold up to examination. Small- and mid-cap earnings have contracted considerably more than S&P 500 earnings, and SMID stocks have de-rated versus large-caps since the fourth quarter of last year, but it is not clear why either of those trends will continue this year. We suspect that SMID underperformance largely reflects a downward revision in expectations that ran a little too high in the wake of the tax cut and the assumption that small-caps would emerge relatively unscathed from new tariff barriers. Large-caps are more globally-oriented, but it’s possible that overweights in Industrials and Discretionaries render small-caps more vulnerable to increased tariff-related input costs. M&A volumes as a share of market cap or GDP have served as a much more reliable proxy for overheated animal spirits. Peaks and troughs in M&A have aligned closely with peaks and troughs in the last two completed business cycles. M&A headlines have revved up in the last month, but the volume of completed deals is not yet at worrisome levels. Our main takeaway from last week’s internal view meeting is that 2019’s worldwide easing of monetary conditions will manifest itself in a pickup in global activity in the first half of 2020. Our bond strategists expect that the Fed’s primary concern is getting inflation expectations up to a level consistent with its inflation target, and that it will strive to maintain policy settings that are perceived as accommodative until it gets the inflation expectations response it seeks. Unless signs of financial instability compel it to tighten policy to contain bubble-like excesses, they expect the Fed to remain on hold for nearly all of 2020. We concur, and therefore expect the monetary backdrop to remain conducive for risk asset outperformance at least into 2021. Investors should maintain risk-friendly positioning against that backdrop.   Doug Peta, CFA Chief US Investment Strategist dougp@bcaresearch.com Footnotes 1 All of BCA’s global recommendations are made from a common-currency perspective. 2 A complete market cycle encompasses a completed bull market (at least 20% closing trough to closing peak gain) and a completed bear market (at least 20% closing peak to closing trough decline). We use the Value Line Index as a small-cap proxy here because it has a 50-year history, unlike the Russell 2000 or SmallCap 600. 3 Multinationals’ effective tax rates are often reduced by their ability to shift income among tax jurisdictions.

The latest NFIB job openings data nosedived, warning that small cap troubles are even deeper than previously assumed. Worrisomely, when compared with non-farm payrolls (gauging the large cap labor market) our proxy is sending an unambiguously negative signal that relative earnings growth will remain downbeat in the coming quarters (middle panel). Already, forward profit estimates are sinking like a stone for small cap indexes, but large caps have remained resilient (bottom panel). Tack on the relative indebtedness of small versus large caps (not shown) and we continue to recommend a large cap size bias.  

The latest NFIB survey made for grim reading. Following up from this Monday’s profit margin report, the forward margin relevant survey subcomponents signal that small business profit margins will suffer a squeeze. Worryingly, both planned price hikes took a turn for the worse and labor compensation remains a thorny issue for small & medium enterprises (SMEs). In fact, this SME margin gauge has fallen below the GFC trough and has only been lower in 1998 (middle panel). This is a warning shot that economically hypersensitive small caps are sending to their large cap brethren and suggests that the wide margin gap is clearly unsustainable. Moreover, recently updated financial statement data revealed that the small cap debt binge continues unabated at a time when cash flow growth has ground to a halt (bottom panel). This is another red flag we are closely monitoring as it will likely infiltrate the extremely depressed corporate default rate. Bottom Line: Adding it all up, we continue to prefer large caps to small caps on a cyclical time horizon, but from a portfolio management perspective, we will obey our trailing stop at the 10% return mark since inception.  

Informe especial

Los inversores deben prestar especial atención a la definición y la metodología al evaluar estrategias de valor frente a crecimiento, tanto académica como prácticamente. Los inversores en valor deberían centrarse en mercados fuera de EE. UU., especialmente en el universo de small caps de mercados emergentes. Los inversores en crecimiento deberían centrarse en las large caps, especialmente en el universo de large caps de EE. UU. Los inversores en small caps deberían centrarse en el valor. Los inversores en large caps y mid caps no deberían apostar estratégicamente entre valor y crecimiento. La rotación táctica de estilo solo debe realizarse cuando los diferenciales de valoración alcanzan niveles extremos.  GAA mantiene una postura neutral con respecto a valor frente a crecimiento, pero prefiere utilizar la posicionamiento por sectores (cíclicos frente a defensivos, financieros frente a tecnología y salud) y el posicionamiento por países (zona euro frente a EE. UU.) para implementar inclinaciones de estilo. Invertir por estilo es tan antiguo como la propia inversión. Valor frente a crecimiento ha sido una de las preguntas que más nos han planteado recientemente nuestros clientes, particularmente dada la pronunciada reversión de estilo en las últimas semanas. En este informe, intentamos responder algunas de las preguntas más frecuentes sobre valor frente a crecimiento. Hemos organizado estas preguntas en cinco secciones separadas: Primero, analizamos 93 años de historia de las carteras de valor y crecimiento de Fama-French para ver cómo han interactuado valor, crecimiento y tamaño a lo largo del tiempo, porque los académicos han usado mayormente el marco de Fama-French. Segundo, examinamos en qué medida son comparables los índices de estilo de EE. UU., incluidos S&P, Russell y MSCI, ya que los practicantes usan mayormente estos índices comerciales como sus puntos de referencia. Tercero, investigamos si los mercados internacionales comparten los mismos ciclos de rendimiento valor-crecimiento que EE. UU., usando la suite de índices valor-crecimiento de MSCI (ya que MSCI es el único proveedor de índices que produce índices valor-crecimiento para cada mercado bajo su cobertura global). Cuarto, investigamos si la exposición pura a valor y crecimiento puede realmente mejorar la diferencia de rendimiento valor-crecimiento comparando los índices de estilo puro de S&P y Russell con sus homólogos estándar. Finalmente, presentamos el enfoque de GAA para las inclinaciones de estilo en una sección sobre nuestras conclusiones de inversión. 1. ¿Es cierto que el valor supera al crecimiento a largo plazo? Existe abundante evidencia académica que respalda la existencia de la prima de valor.1 Académicamente, la “prima de valor”, también conocida como la prima HML (alto menos bajo), o la sobreperformancia del valor, se define como la diferencia de rendimiento entre las acciones más baratas y las más caras. Aunque Fama y French usaron el ratio valor contable/precio como el único criterio de valoración,2 muchos investigadores han combinado el valor contable/precio con otras medidas de valoración como ganancias/precio, ventas/precio, rendimiento por dividendo,3 y así sucesivamente.  También existe evidencia académica que sugiere que “la sobreperformancia del valor es casi inexistente entre las acciones de gran capitalización.”4 Además, en 2014 Fama y French causaron un gran revuelo al publicar el documento de trabajo “A Five-Factor Asset Pricing Model” que demuestra que “HML es un factor redundante” porque “el retorno promedio de HML está capturado por la exposición de HML a otros factores” (como tamaño, rentabilidad y patrón de inversión) basándose en datos de EE. UU. de 1963 a 2013.5 Los propietarios de activos y asignadores deberían prestar especial atención al seleccionar puntos de referencia para valor y crecimiento. Para los practicantes no cuantitativos, especialmente los inversores long-only, valor y crecimiento son dos estilos de inversión separados, aunque la clasificación por estilo comparte el mismo principio que el “factor valor” académico. Sus definiciones varían, como lo demuestra la forma en que S&P Dow Jones, FTSE Russell y MSCI definen sus índices de valor y crecimiento (ver la siguiente sección en la página 7). En general, las acciones de valor están baratas, con un potencial de crecimiento de ganancias por debajo del promedio, mientras que las acciones de crecimiento tienen un potencial de crecimiento de ganancias por encima del promedio pero son muy caras. Sin embargo, los índices publicados por los proveedores comerciales no tienen historias muy largas. Afortunadamente, Fama y French también proporcionan carteras valor-crecimiento-tamaño en su sitio web público.6 Tabla II-1 muestra que en 93 años, de julio de 1926 a junio de 2019, las carteras de valor de EE. UU. en los segmentos de large-cap y small-cap basadas en el conocido enfoque de Fama-French han rendido más que sus contrapartes de crecimiento, sin importar si las carteras están ponderadas por igual o por capitalización de mercado. Lo más llamativo es que el small-cap value ponderado por igual superó a su homólogo de crecimiento por más de un 10% anual en términos absolutos, y ha más que duplicado el rendimiento ajustado por riesgo en comparación con su contraparte de crecimiento. Tabla II-1 Rendimiento de las carteras Fama-French Valor-Crecimiento-Tamaño* octubre de 2019 octubre de 2019 Algunos medios han afirmado que las acciones de valor son “menos volátiles” porque en promedio son “empresas más grandes y más consolidadas.”7 Esto puede ser cierto en algunos periodos específicos. Sin embargo, para los 93 años cubiertos por Fama y French, esta creencia común no está respaldada. De hecho, las carteras de valor en los universos de large y small caps han mostrado consistentemente una mayor volatilidad que las carteras de crecimiento, sin importar cómo se ponderen los componentes. Los retornos en exceso, no obstante, han más que compensado las mayores volatilidades en tres de los cuatro pares, siendo la excepción el large-cap growth ponderado por capitalización de mercado, que tiene un retorno ajustado por riesgo ligeramente superior debido a una volatilidad mucho menor que su contraparte de valor. Desde una perspectiva muy a largo plazo, la sobreperformancia del valor proviene de asumir mayor riesgo. Un análisis adicional muestra que la superior sobreperformancia a largo plazo del valor respecto al crecimiento provino principalmente durante los primeros 80 años de la muestra de 93 años de Fama y French. En años más recientes, desde 2007, sin embargo, el valor ha tenido un desempeño inferior al crecimiento de forma significativa en tres de los cuatro pares valor-crecimiento de Fama-French, siendo la excepción el par small-cap ponderado por igual, como se muestra en la Tabla II-2. Aunque el small-cap value ponderado por igual todavía ha superado a su homólogo de crecimiento en el periodo más reciente, la tasa de éxito cae al 54% comparado con el 76% en los primeros 80 años, mientras que la magnitud de la sobreperformancia media por año calendario cae a un escaso 1.3%, en comparación con 12.5% en los primeros 80 años. Tabla II-2 La lucha entre valor y crecimiento* octubre de 2019 octubre de 2019 El análisis estadístico es sensible al periodo de tiempo escogido. ¿Cómo han rendido valor y crecimiento a lo largo del tiempo? Gráfico II-1 muestra la dinámica a largo plazo entre valor, crecimiento y tamaño. Las siguientes conclusiones son claras: Gráfico II-1 Dinámica de rendimiento Fama-French Valor-Crecimiento-Tamaño* Fama-French Dinámicas de Rendimiento Valor-Crecimiento-Tamaño* Fama-French Dinámicas de Rendimiento Valor-Crecimiento-Tamaño* Los inversores en valor deberían favorecer las small caps sobre las large caps, mientras que los inversores en crecimiento deberían hacer lo contrario, favoreciendo las large caps sobre las small caps, aunque con mucho menos probabilidad de éxito (Gráfico II-1, panel 1). Los inversores en small caps deberían favorecer las acciones de valor sobre las de crecimiento (panel 2). La sobreperformancia del valor en el espacio de large caps (panel 3) es mucho más débil que en el espacio de small caps (panel 2). Fama y French definen small y large caps en función de la mediana de capitalización de mercado de todas las acciones del NYSE en CRSP (Center for Research In Security Prices), luego usan la mediana de tamaño del NYSE para dividir NYSE, AMEX y NASDAQ (después de 1972) en un grupo de small caps y un grupo de large caps. La división de valor y crecimiento se basa en el valor contable/precio, con las acciones en el 30% más bajo clasificadas como crecimiento y el 30% más alto como valor. Curiosamente, small-cap value y small-cap growth representan solo una porción muy pequeña de todo el universo, como se muestra en los Gráficos II-2A y II-2B. La capitalización de mercado promedio de las acciones de valor es aproximadamente la mitad de la de las acciones de crecimiento, tanto en los universos de large caps como de small caps (panel 3 en los Gráficos II-2A y II-2B). Nuevamente, esto no apoya algunas afirmaciones de los medios de que las acciones de valor son empresas más grandes y más consolidadas. Sin embargo, refuerza la recomendación de que todos los inversores deberían favorecer las acciones small-cap value. Desafortunadamente, “small-cap value” es un universo muy pequeño. A junio de 2019, la capitalización total del mercado accionario de EE. UU. según CRSP era de 26.2 billones de dólares, y small-cap value representaba solo el 1.5% (unos 383 mil millones de dólares); incluso large-cap value comprende solo un peso relativamente pequeño, 13% (US$3.5 billones). Gráfico II-2A Carteras Small-Cap Valor-Crecimiento* Carteras de pequeña capitalización: valor y crecimiento Carteras de pequeña capitalización: valor y crecimiento Gráfico II-2B Carteras Large-Cap Valor-Crecimiento* Carteras de gran capitalización de valor y crecimiento Carteras de gran capitalización de valor y crecimiento   El mercado de EE. UU. está dominado por acciones de crecimiento de large caps con un peso elevado del 56% (US$14.7 billones, a junio de 2019). Esto es alentador porque la investigación académica muestra que la prima de valor entre las large caps es débil. Pero la debilidad del large-cap value comenzó principalmente a partir de 2007, tras 80 años de fortaleza relativa frente al large-cap growth (Gráfico II-1, panel 3). El enfoque Fama-French es ampliamente usado en la investigación académica, en parte por su larga historia desde 1926. Para los practicantes no cuantitativos, especialmente los inversores long-only, sin embargo, los índices comerciales de FTSE Russell, S&P Dow Jones y MSCI son más frecuentemente utilizados como puntos de referencia de rendimiento. En este informe, estudiamos una serie de índices comerciales valor-crecimiento en EE. UU. y a nivel global para arrojar luz sobre la dinámica valor-crecimiento y cómo los asignadores de activos pueden incorporarla en sus procesos de toma de decisiones. 2. No todos los índices de estilo de EE. UU. son iguales Tres grandes proveedores de índices tienen índices de estilo. Son FTSE Russell (que lanzó el primer conjunto de índices valor-crecimiento de la industria en 1987), S&P Dow Jones y MSCI. MSCI es el único proveedor que tiene una suite completa de índices valor-crecimiento para todos los mercados individuales bajo su cobertura, usando la misma metodología. Mientras que los tres proporcionan índices de estilo “estándar” que incluyen la totalidad de componentes del índice padre, FTSE Russell y S&P Dow Jones también ofrecen índices de estilo “puros”. Hay dos diferencias principales entre los índices de estilo “estándar” y “puros”: 1) los índices estándar están ponderados por capitalización de mercado, mientras que los índices “puros” están ponderados en base a la puntuación de estilo. 2) El valor estándar y el crecimiento estándar tienen componentes superpuestos, mientras que valor puro y crecimiento puro no comparten componentes comunes. Preferimos utilizar el posicionamiento por sectores y países para implementar inclinaciones de estilo de forma táctica. Además del valor contable/precio, la variable de valor usada por el enfoque de Fama-French, los tres proveedores han añadido diferentes variables en la determinación de valor y crecimiento, como se muestra en la Tabla II-3. Esto también refleja la evolución del entendimiento de la industria sobre valor y crecimiento. Por ejemplo, cuando MSCI lanzó por primera vez su índice de estilo en 1997, usó solo el valor contable/precio, pero cambió su enfoque en mayo de 2003 al actual marco “multifactor de dos dimensiones”. Tabla II-3 Criterios de los índices Valor-Crecimiento octubre de 2019 octubre de 2019 Debido a las diferencias en la metodología de construcción del índice, los índices valor-crecimiento para EE. UU. se han comportado de manera diferente. El S&P 500, el Russell 1000 y los índices estándar de MSCI (large y mid-cap) son puntos de referencia institucionales ampliamente seguidos, con historias retroactivas que datan de los años 70. El Gráfico II-3 muestra la dinámica relativa de rendimiento valor/crecimiento de los tres proveedores de índices, junto con la de Fama y French (ponderada por capitalización de mercado, para ser consistente con el enfoque de los proveedores de índices). Se pueden observar lo siguiente: Gráfico II-3 ¿Qué valor/crecimiento? ¿Cuál: valor o crecimiento? ¿Cuál: valor o crecimiento? Ninguno de los tres pares se parece exactamente al valor/crecimiento ponderado por capitalización de mercado de Fama-French. Esto plantea la pregunta de cómo puede aplicarse el análisis histórico basado en la larga historia de las carteras valor/crecimiento de Fama-French a los índices comerciales. En el primer ciclo desde 1975 hasta febrero de 2000, los tres pares de índices hicieron un viaje circular, con un rendimiento plano entre valor y crecimiento. Además, aunque el S&P 500 y el Russell 1000 estaban más estrechamente correlacionados entre sí que con MSCI, los tres eran bastante similares. En el ciclo actual que comenzó en febrero de 2000, sin embargo, el valor/crecimiento de Russell se recuperó con mucha más fuerza que los otros dos. Pero en el periodo bajista que comenzó en 2007, los tres índices se comportaron de forma alineada, como se muestra en la Tabla II-4. Tabla II-4 Rendimiento de los índices de estilo en EE. UU.* octubre de 2019 octubre de 2019 Además, la diferencia entre S&P y Russell no solo se da entre el S&P 500 y el Russell 1000. En realidad existe en cada segmento por capitalización de mercado, como se muestra en el Gráfico II-4. Desafortunadamente, MSCI no proporciona historia desde 1975 para los segmentos detallados por capitalización. En el ciclo actual desde febrero de 2000, el valor de S&P se recuperó menos entre 2000 y 2006. ¿Por qué? Gráfico II-4 Conoce tu punto de referencia Conoce tu referencia Conoce tu referencia Gráfico II-5 Valor/Crecimiento: Russell Vs. S&P Valor/Crecimiento: Russell Vs. S&P Valor/Crecimiento: Russell Vs. S&P Una investigación más profunda revela algunas observaciones interesantes, como se muestra en el Gráfico II-5. A nivel agregado, el S&P 1500, el Russell 3000 y sus respectivos índices de estilo se han comportado en gran medida de forma alineada en el ciclo más reciente que comenzó en febrero de 2000 (Gráfico II-5, panel 4), reflejando la tendencia de la industria hacia la convergencia de índices. En distintos segmentos por capitalización, sin embargo, la divergencia sigue siendo prominente, especialmente en el espacio de small caps (panel 1). El S&P 600 ha superado de forma consistente al Russell 2000 tanto en las categorías de valor como de crecimiento. Además de los diferentes factores de estilo, esta consistencia también refleja universos distintos, distribución de tamaño y exposición sectorial, como se explicó en un anterior Informe Especial de GAA sobre small caps.8 Los gestores con el Russell 2000 como punto de referencia de rendimiento podrían simplemente superarlo haciendo un intercambio de rendimiento total entre el Russell 2000 y el S&P 600. Conclusión: Los propietarios de activos y asignadores deberían prestar especial atención al seleccionar puntos de referencia para valor y crecimiento.  3. ¿Cómo han rendido valor y crecimiento a nivel global? MSCI es el único proveedor de índices que también produce índices valor-crecimiento para cada mercado de renta variable bajo su cobertura global, usando la misma metodología. Desafortunadamente, solo el universo “estándar” (es decir, large- y mid-cap) tiene una historia larga, que data de diciembre de 1974. Los Gráficos II-6A y II-6B muestran la dinámica valor/crecimiento en mercados desarrollados y emergentes principales. El rendimiento relativo de MSCI DM value frente a growth comparte un patrón similar al de EE. UU. en el ciclo más reciente desde 2000, pero se ve muy diferente en el periodo anterior a 2000 (Gráfico II-6A). La ratio de EM large- y mid-cap value frente a growth no alcanzó su pico hasta febrero de 2012, unos cinco años después del pico de su par DM (Gráfico II-6B, panel 1). Por otro lado, el small-cap value de EM ha reanudado su sobreperformancia frente a growth desde principios de 2016, después de haber alcanzado su pico aproximadamente al mismo tiempo que su homólogo de large caps. Gráfico II-6A ¿Está muerto el valor en los mercados desarrollados? ¿Está muerto el valor en DM? ¿Está muerto el valor en DM? Gráfico II-6B ¿Está muerto el valor en los mercados emergentes? ¿Está muerto el value en los mercados emergentes? ¿Está muerto el value en los mercados emergentes?   La dinámica global valor/crecimiento también muestra que el efecto de “valor que supera a crecimiento” es más prominente en el espacio de small caps. Pero, ¿por qué el small value también ha tenido un desempeño inferior al small growth en la mayoría de los mercados desarrollados? Nuestra explicación es que el universo de mercados emergentes es mucho menos eficiente que el de mercados desarrollados porque no hay muchos fondos cuantitativos dedicados al espacio small-cap de EM, además de que, en general, las small caps de EM son mucho más pequeñas que las de los mercados desarrollados. Esto también está en línea con nuestro hallazgo de que, en general, las primas de factores son más prominentes en el universo EM.9 Conclusión: La prima de valor es más prominente en mercados fuera de EE. UU., especialmente en el universo de small caps de mercados emergentes. 4. ¿Mejoran el rendimiento los índices de estilo puro? Tanto S&P Dow Jones como FTSE Russell proporcionan índices pure-value y pure-growth. A diferencia de los índices valor-crecimiento estándar, que tienen como objetivo aproximadamente el 50% de la capitalización de mercado del índice padre, los índices de estilo puro incluyen solo las acciones con las características de valor y crecimiento más fuertes. No hay solapamiento entre los dos. En teoría, los índices de estilo puro deberían superar a los índices de estilo estándar debido a su exposición concentrada a los factores de estilo. ¿Cómo les va en la realidad? La Tabla II-5 muestra que en términos de rendimiento absoluto, este es efectivamente el caso para 14 de los 18 pares de índices de S&P y Russell para el periodo entre 1998 y 2019. Sin embargo, los mayores retornos por una mayor exposición a factores de estilo han venido en gran medida de una volatilidad mucho más alta en 17 de los 18 pares. En general, el estilo puro tiene mayor volatilidad que el estilo estándar, siendo la única excepción el espacio mid-cap value de Russell. Por lo tanto, en términos ajustados por riesgo, el estilo puro no es necesariamente mejor. Tabla II-5 Más puro no es necesariamente mejor octubre de 2019 octubre de 2019 Los Gráficos II-7A y II-7B muestran las diferentes dinámicas de rendimiento de las familias de índices de estilo de S&P y Russell. Para los índices de S&P, el pure growth ha superado al standard growth durante todo el periodo en los tres segmentos por capitalización, pero solo el S&P 500 pure value superó a su homólogo estándar. Por lo tanto, una mayor exposición concentrada a las características de estilo ha mejorado la diferencia valor-crecimiento solo en el espacio de large caps, pero en realidad la ha empeorado en los universos de mid y small caps (Gráfico II-7A). Gráfico II-7A Estilos puros de S&P* S&P Estilos Puros* S&P Estilos Puros* Gráfico II-7B Estilos puros de Russell* Russell Estilos Puros* Russell Estilos Puros*   Para los índices de Russell, está claro que hubo muchas más acciones tecnológicas en sus índices pure-growth antes de la burbuja tecnológica de 2000, porque el pure growth subió mucho más que el standard growth antes del estallido de la burbuja y también cayó con mayor severidad tras ella. En general, solo en el espacio de small caps mejoró la diferencia valor-crecimiento por la exposición más concentrada a factores de estilo. Sin embargo, esta mejora no se debió a la sobreperformancia del estilo puro respecto a los índices estándar. De hecho, tanto pure value como pure growth en el universo small-cap tuvieron un rendimiento inferior a sus homólogos estándar, pero pure growth lo hizo aún peor (Gráfico II-7B y Tabla II-5). 5. Conclusiones de inversión Valor y crecimiento pueden significar cosas muy distintas y comportarse de forma muy diferente. Los inversores deben prestar especial atención a las definiciones y metodologías al evaluar índices o estrategias por estilo, tanto académica como prácticamente. Dependiendo del mandato del inversor, se recomiendan las siguientes acciones: Los inversores en valor deberían centrarse en mercados fuera de EE. UU., especialmente en el universo de small caps de mercados emergentes. Los inversores en crecimiento deberían centrarse en las large caps, especialmente en el espacio de large caps de EE. UU. Los inversores en small caps deberían centrarse en el valor. Los inversores en large caps y mid caps no deberían apostar estratégicamente entre valor y crecimiento. La rotación táctica de estilo solo debe hacerse cuando los diferenciales de valoración alcanzan niveles extremos. El precio/valor contable es la única variable común usada en la determinación de valor y crecimiento por académicos y practicantes. Su historial como predictor sistemático de retornos ha sido pobre, como se muestra en el panel 2 de los Gráficos II-8A y II-8B. Otro factor para el que tenemos una larga serie histórica es el rendimiento por dividendo. Su poder predictivo es incluso peor que el del precio/valor contable (panel 3). Gráfico II-8A La valoración es una mala herramienta de timing en EE. UU. La Valoración Es Una Mala Herramienta Para Cronometrar El Mercado En EE. UU. La Valoración Es Una Mala Herramienta Para Cronometrar El Mercado En EE. UU. Gráfico II-8B La valoración es una mala herramienta de timing a nivel global La valoración es una mala herramienta para elegir el momento La valoración es una mala herramienta para elegir el momento   Se han utilizado muchos factores junto con el precio/valor contable tanto por académicos como por practicantes para cronometrar la rotación entre valor y crecimiento. Sin embargo, los resultados han sido mixtos. Los modelos de regresión que predijeron correctamente en el pasado pueden no funcionar en el futuro. Por ejemplo, un modelo de regresión basado en el diferencial de valoración y el diferencial de crecimiento de ganancias usando datos de enero de 1982 a octubre de 1999 predijo con éxito la recuperación de la sobreperformancia del valor a partir de principios de 2000,10 pero el sufrimiento universal de los fondos de valor en los últimos años implica que este modelo pudo haber dado muchas señales falsas. Gráfico II-9 demuestra lo difícil que es usar modelos de regresión como herramienta de timing para la rotación valor-crecimiento. Se realiza una regresión simple entre las diferencias de rendimiento valor y crecimiento (retornos subsiguientes a 60 meses) y el precio/valor relativo. Para los datos de diciembre de 1974 a julio de 2019, el r-cuadrado para el MSCI world es 0.38 y para EE. UU. es 0.09. En retrospectiva, ambos modelos predijeron la sobreperformancia del valor a partir de principios de 2000. Sin embargo, las brechas entre el valor real y el valor ajustado comenzaron a abrirse mucho antes de 2000. A finales de 1998, las brechas ya eran más amplias que los mínimos del ciclo anterior, sin embargo continuaron ampliándose mientras el valor seguía teniendo un desempeño inferior al crecimiento hasta febrero de 2000. Gráfico II-9 ¿Qué tan buena es la ajustabilidad? ¿Cuán buen es el ajuste? ¿Cuán buen es el ajuste? ¿Qué deberían hacer actualmente los inversores, basándose en estos modelos? Las brechas son grandes, pero no tan grandes como a principios de 2000. ¿En qué punto deberían los inversores comenzar a cambiar hacia el valor dado su más de 12 años de subperformancia? Hemos escrito a menudo que preferimos utilizar el posicionamiento por sectores y países para implementar inclinaciones de estilo.11, 12  Esta preferencia no ha cambiado. Los índices de valor y crecimiento tienen sesgos sectoriales que cambian con el tiempo. Actualmente, los índices de valor large- y mid-cap de S&P Dow Jones tienen un claro sobrepeso en financieros pero un infrapeso en tecnología y salud en comparación con sus contrapartes de crecimiento (Tabla II-6). Tabla II-6 Apuestas sectoriales en índices de valor y crecimiento* octubre de 2019 octubre de 2019 Gráfico II-10 Preferir posicionamiento por sector y país frente a estilo Prefiera el posicionamiento por sector y país frente a los sesgos de estilo Prefiera el posicionamiento por sector y país frente a los sesgos de estilo Hemos estado neutrales respecto a valor y crecimiento, pero probablemente cambiaríamos esta visión si cambiáramos nuestra asignación de renta variable entre EE. UU. y la zona euro, y nuestra asignación sectorial de renta variable entre cíclicos y defensivos así como entre financieros y tecnología de la información (Gráfico II-10). Xiaoli Tang Vicepresidente asociado​​​​​​​ Global Asset Allocation   Notas al pie 1     Antti Ilmanen, Ronen Israel, Tobias J. Moskowitz, Ashwin Thapar, Franklin Wang, “Primas de factores y sincronización de factores: Un siglo de evidencia,” Documento de trabajo de AQR, 2 de julio de 2019. 2     Eugene F. Fama y Kenneth R. French, “Common risk factors in the return on stocks and bonds,” Journal of Financial Economics, 33 (1993). 3     Clifford Asness, Andrea Frazzini, Ronen Israel y Tobias Moskowitz, “Hecho, ficción e inversión en valor,” The Journal of Portfolio Management, Vol. 42 No.1, otoño de 2015. 4     Ronen Israel y Tobias J. Moskowitz, “The Role of Shorting, Firm Size and Time on Market Anomalies,” Journal of Financial Economics, Vol 108, Issue 2, mayo de 2013 5      Eugene F. Fama y Kenneth R. French, “Un modelo de fijación de precios de activos de cinco factores,” Documento de trabajo, Universidad de Chicago, septiembre de 2014. 6             Carteras valor-crecimiento-tamaño de Fama-French. 7     Mark P. Cussen, “¿Acciones de valor o de crecimiento: cuáles son mejores?” Investopedia, 25 de junio de 2019. 8     Consulte el Informe Especial de Global Asset Allocation titulado “Small Cap Outperformance: Fact or Myth?” fechado el 7 de abril de 2017, disponible en gaa.bcaresearch.com. 9     Consulte el Informe Especial de Global Asset Allocation titulado, “¿Es Smart Beta una herramienta útil en la asignación global de activos?” fechado el 8 de julio de 2016, disponible en gaa.bcaresearch.com. 10    Clifford S. Asness, Jacques A. Friedman, Robert J. Krail y John M Liew, “Style Timing: Value versus Growth,” The Journal of Portfolio Management, primavera de 2000. 11     Consulte el Global Asset Allocation Quarterly Portfolio Outlook, “Quarterly - March 2016,” fechado el 31 de marzo de 2016, y disponible en gaa.bcaresearch.com. 12     Consulte el Global Asset Allocation Quarterly Portfolio Outlook, “Quarterly - April 2019,” fechado el 1 de abril de 2019 disponible en gaa.bcaresearch.com.

Informe especial

Highlights Investors should pay particular attention to definition and methodology when evaluating value versus growth strategies, both academically and in practice. Value investors should focus on non-U.S. markets, especially the emerging market small-cap universe. Growth investors should focus on large caps, especially the U.S. large-cap universe. Small-cap investors should focus on value. Large- and mid-cap investors should not be making bets between value and growth strategically. Tactical style rotation should be done only when valuation spreads reach extreme levels.  GAA remains neutral on value versus growth, but prefers to use sector positioning (cyclicals versus defensives, financials versus tech and health care) and country positioning (euro area versus U.S.) to implement style tilts. Feature Investing by way of style is as old as investing itself. Value versus growth has been one of the most frequently asked questions among our clients of late, particularly given the sharp style reversal in recent weeks. In this report, we attempt to answer some of the most often-asked questions on value versus growth. We have arranged these questions into five separate sections: First, we look at 93 years of history of the Fama-French value and growth portfolios to see how value, growth, and size have interacted over time, because academics have mostly used the Fama-French framework. Second, we look at how comparable U.S. style indices are, including the S&P, the Russell and the MSCI, since practitioners mostly use these commercial indices as their benchmarks. Third, we investigate if international markets share the same value-growth performance cycles as the U.S., using the MSCI suite of value-growth indices (since MSCI is the only index provider that produces value-growth indices for each market under its global coverage). Fourth, we investigate if pure exposure to value and growth can actually improve the value-growth performance spread by comparing the pure style indices from the S&P and the Russell to their standard counterparts. Finally, we present the GAA approach to style tilts in a section on our investment conclusions. 1. Is It True That Value Outperforms Growth In The Long Run? There has been overwhelming academic evidence supporting the existence of the value premium.1 Academically, the “value premium”, also known as the HML (high minus low) factor premium, or the value outperformance, is defined as the return differential between the cheapest stocks and the most expensive. Even though Fama and French used book-to-price as the sole valuation criterion,2 many researchers have combined book-to-price with other valuation measures such as earnings-to-price, sales-to-price, dividend yield,3 and so on.  There is also academic evidence suggesting that “value outperformance is almost non-existent among large-cap stocks.”4 What is more, in 2014 Fama and French caused a huge stir by publishing “A Five-Factor Asset Pricing Model” working paper demonstrating that “HML is a redundant factor” because “the average HML return is captured by the exposure of the HML to other factors” (such as size, profitability, and investment pattern) based on U.S. data from 1963 to 2013.5 For non-quant practitioners, especially the long-only investors, value and growth are two separate investment styles, even though the style classification shares the same principle as the academic “value factor.” Their definitions vary, as evidenced by how S&P Dow Jones, FTSE Russell, and MSCI define their value and growth indexes (see next section on page 7). In general, value stocks are cheap, with lower-than-average earnings growth potential, while growth stocks have higher-than-average earnings growth potential but are very expensive. The indices published by commercial index providers do not have very long histories, however. Fortunately, Fama and French also provide value-growth-size portfolios on their publicly available website.6  Table 1 shows that for 93 years, from July 1926 to June 2019, U.S. value portfolios in both large-cap and small-cap buckets based on the well-known Fama-French approach have returned more than their growth counterparts, no matter whether the portfolios are equal-weighted or market-cap-weighted. Most strikingly, equal-weighted small-cap value outperformed its growth counterpart by over 10% a year in absolute terms, and has more than doubled the risk-adjusted return compared to its growth counterpart. Table 1Fama-French Value-Growth-Size Portfolio Performance* Some media reports have claimed that value stocks are “less volatile” because they are on average “larger and better-established companies.”7 This may be true for some specific time periods. For the 93 years covered by Fama and French, however, this common belief is not supported. In fact, value portfolios in both the large- and small-cap universes have consistently had higher volatility than growth portfolios, no matter how the components are weighted. The excess returns, however, have more than offset the higher volatilities in three out of four pairs, with the exception being market cap-weighted large-cap growth, which has a slightly higher risk-adjusted return due to much lower volatility than its value counterpart. From a very long-term perspective, the value outperformance does come from taking higher risk. Further investigation shows that the superior long-run outperformance of value relative to growth came mostly in the first 80 years of Fama and French’s 93-year sample. In more recent years since 2007, however, value has underperformed growth significantly in three out of the four Fama-French value-growth pairs, with the equal-weighted small-cap value-growth pair being the sole exception, as shown in Table 2. Even though the equal-weighted small-cap value has still outperformed its growth counterpart in the most recent period, the hit ratio drops to 54% compared to 76% in the first 80 years, while the magnitude of average calendar-year outperformance drops to a meager 1.3%, compared to 12.5% in the first 80 years. Table 2The Fight Between Value And Growth* Statistical analysis is sensitive to the time period chosen. How have value and growth been performing over time? Chart 1 shows the long-term dynamics among value, growth, and size. The following conclusions are clear: Value investors should favor small caps over large caps, while growth investors should do the opposite, favoring large caps over small caps, albeit with much less potential success (Chart 1, panel 1). Small-cap investors should favor value stocks over growth stocks (panel 2). Value outperformance in the large-cap space (panel 3) is much weaker than in the small-cap space (panel 2). Chart 1Fama-French Value-Growth-Size Peformance Dynamics* Asset owners and allocators should pay special attention when selecting benchmarks for value and growth. Fama and French define small and large caps based on the median market cap of all NYSE stocks on CRSP (Center for Research In Security Prices), then use the NYSE median size to split NYSE, AMEX and NASDAQ (after 1972) into a small-cap group and a large-cap group. The value and growth split is based on book-to-price, with stocks in the lowest 30% classified as growth, and the highest 30% as value. Interestingly, small-cap value and small-cap growth account for only a very small portion of the entire universe, as shown in Charts 2A and 2B. Chart 2ASmall-Cap Value-Growth Portfolios* Chart 2BLarge-Cap Value-Growth Portfolios* Value stocks’ average market cap is about half of that of growth stocks, in both the large- and small-cap universes (panel 3 in Charts 2A and 2B). Again, this does not support some media claims that value stocks are larger and better-established companies. However, it does add further support to the claim that all investors should favor small-cap value stocks. Unfortunately, “small-cap value” is a very small universe. As of June 2019, the CRSP total U.S. equity market cap was $26.2 trillion, with small-cap value accounting for only 1.5% (about $383 billion); even large-cap value comprises only a relatively small weight, 13% (US$3.5 trillion). The U.S. market is dominated by large-cap growth stocks with a heavy weight of 56% (US$14.7 trillion, as of June 2019). This is encouraging because academic research does show that the value premium among large caps is weak. But the large-cap value weakness mostly started from 2007, after 80 years of strength relative to large-cap growth (Chart 1, panel 3). The Fama-French approach is widely used in academic research, partly due to its long history from 1926. For non-quant practitioners, especially long-only investors, however, commercial indexes from FTSE Russell, S&P Dow Jones, and MSCI are more often used as performance benchmarks. In this report, we study a series of commercial value-growth indexes in the U.S. and globally to shed light on value-growth dynamics, and how asset allocators can incorporate them into their decision-making processes. 2. Not All U.S. Style Indexes Are Created Equal Three major index providers have style indices. They are FTSE Russell (which launched the industry’s first set of value-growth indexes in 1987), S&P Dow Jones, and MSCI. MSCI is the only provider that has a full suite of value-growth indices for all individual markets under coverage. While all three provide “standard” style indices that include the full component of the parent index, the FTSE Russell and the S&P Dow Jones also provide “pure” style indices. There are two major differences between “standard” and “pure” style indices: 1) the standard indices are market-cap weighted, while the “pure” indices are weighted based on style score. 2) Standard value and standard growth have overlapping components, while pure value and pure growth do not share any common components. Other than book-to-price, the value variable used by the Fama-French approach, the three providers have added different variables in the determination of value and growth, as shown in Table 3. This also reflects the evolution of the industry’s understanding on value and growth. For example, when MSCI first launched its style index in 1997, it used only book-to-price, but changed its approach in May 2003 to the current “multi-factor two-dimension” framework. Table 3Value-Growth Index Criteria Because of the differences in index construction methodology, value-growth indices for the U.S. have behaved differently. The S&P 500, the Russell 1000, and the MSCI standard (large and mid-cap) indices are widely followed institutional benchmarks, with back-tested history dating to the 1970s. Chart 3 shows the relative value/growth performance dynamics from the three index providers, together with that from Fama and French (market value-weighted, to be consistent with the approach from the index providers). One can observe the following: Chart 3Which Value/Growth? None of the three pairs looks exactly like Fama-French’s market-cap value-weighted value/growth. This raises the question of how historical analysis based on the long history of Fama-French value/growth portfolios can be applied to the commercial indices. In the first cycle from 1975 to February 2000, all three index pairs made a round trip, with flat performance between value and growth. Also, even though the S&P 500 and Russell 1000 were more closely correlated with one another than with the MSCI, the three were quite similar. In the current cycle that began in February 2000, however, Russell value/growth has rebounded much more strongly than the other two. But in the down period that started in 2007, the three indices performed in line with each other, as shown in Table 4. Table 4U.S. Style Index Performance* In addition, the difference between S&P and Russell does not just lie between the S&P 500 and the Russell 1000. It actually exists in every market-cap segment, as shown in Chart 4. Unfortunately, MSCI does not provide history from 1975 for the detailed cap segments. In the current cycle since February 2000, S&P value rebounded the least between 2000 and 2006. Why? Chart 4Know Your Benchmark Further investigation reveals some interesting observations, as shown in Chart 5. Chart 5Value/Growth: Russell Vs. S&P At the aggregate level, the S&P 1500, the Russell 3000 and their respective style indices have performed largely in line with one another in the most recent cycle starting from February 2000 (Chart 5, panel 4), reflecting the industry trend of index convergence. In different market cap segments, however, the divergence is still prominent, especially in the small-cap space (panel 1). The S&P 600 has consistently outperformed the Russell 2000 in both the value and growth categories. In addition to different style factors, this consistency also reflects different universes, size distribution, and sector exposure, as explained in an earlier GAA Special Report on small caps.8 Managers with Russell 2000 as their performance benchmark could simply beat it by doing a total-return-performance swap between the Russell 2000 and the S&P 600. Bottom Line:  Asset owners and allocators should pay special attention when selecting benchmarks for value and growth.  3. How Have Value And Growth Performed Globally? MSCI is the only index provider that also produces value-growth indices for each equity market under its global coverage, using the same methodology. Unfortunately, only the “standard” (i.e., large- and mid-cap) universe has a long history, dating from December 1974. Charts 6A and 6B show the value/growth dynamics in major DM and EM markets. The relative performance of MSCI DM value versus growth shares a similar pattern to that of the U.S. in the latest cycle since 2000, but looks very different in the period before 2000 (Chart 6A). The ratio of EM large- and mid-cap value versus growth did not peak until February 2012, about five years after the peak of its DM peer (Chart 6B, panel 1). On the other hand, EM small-cap value has resumed its outperformance versus growth since early 2016 after having peaked around the same time as its large-cap counterpart. Chart 6AIs Value Dead In DM? Chart 6BIs Value Dead In EM? The global value/growth dynamics also show that the “value outperforming growth” effect is more prominent in the small-cap space. But why has small value also underperformed small growth in most DM markets? Our explanation is that the EM universe is much less efficient than the DM universe because there are not many quant funds dedicated to the EM small-cap space –  in addition to the fact that, in general, EM small caps are much smaller than those in DM markets. This is also in line with our finding that, in general, factor premia are more prominent in the EM universe.9 Bottom Line: Value premium is more prominent in non-U.S. markets, especially the EM small-cap universe. 4. Do Pure Style Indices Improve Performance? Both S&P Dow Jones and FTSE Russell provide pure-value and pure-growth indices. Unlike the standard value-growth indices, which target about 50% of the parent market cap, the pure-style indices include only stocks with the strongest value and growth characteristics. There is no overlap between the two. We prefer to use sector and country positioning to implement style tilts tactically. In theory, the pure-style indices should outperform the standard-style indices because of their concentrated exposure to style factors. How do they do in reality? Table 5 shows that in terms of absolute return, this is indeed the case for 14 out of the 18 pairs of indices from S&P and Russell for the period between 1998 and 2019. However, the higher returns from greater exposure to style factors have largely come from much higher volatility in 17 out of the 18 pairs. Pure style has higher volatility than standard style in general, the only exception being the Russell mid-cap value space. As such, on a risk-adjusted basis, pure style is not necessarily better. Table 5Purer Is Not Necessarily Better Charts 7A and 7B show the different performance dynamics for the S&P and Russell families of style indices. For the S&P indices, pure growth has outperformed standard growth for the entire period in all three market-cap segments, but only the S&P 500 pure value outperformed its standard counterpart. Therefore, more concentrated exposure to style characteristics has improved the value-growth spread only in the large-cap space, but it has actually worsened the value-growth spread in the mid- and small-cap universes (Chart 7A). Chart 7AS&P Pure Styles* Chart 7BRussell Pure Styles* For the Russell indices, it’s clear that there were a lot more tech stocks in its pure-growth indices leading up to the 2000 tech bubble, because pure growth shot up significantly more than the standard growth before the bubble burst, and also crashed more severely following it. Overall, only in the small-cap space did the value-growth spread improve by the more concentrated exposure to style factors. However, this improvement was not because of the outperformance of the pure-style relative to the standard indices. In fact, both pure value and pure growth in the small-cap universe underperformed their standard counterparts, but pure growth performed even worse (Chart 7B and Table 5). 5. Investment Conclusions Value and growth can mean very different things and behave very differently. Investors should pay special attention to the definitions and methodologies when evaluating style indices or strategies, both academically and in practice.  Depending on an investor’s mandate, the following is recommended: Value investors should focus on non-U.S. markets, especially the emerging market small-cap universe. Growth investors should focus on large caps, especially the U.S. large-cap space. Small-cap investors should focus on value. Large-and mid-cap investors should not make bets between value and growth strategically. Tactical style rotation should be done only when valuation spreads reach extreme levels. Price-to-book is the only common variable used in the determination of value and growth by academics and practitioners. Its track record as a systematic return predictor has been poor, as shown in panel 2 of Charts 8A and 8B. Another factor we have a long history for is dividend yield. Its predictive power is even worse than that of price-to-book (panel 3). Chart 8AValuation Is A Poor Timing Tool In The U.S. Chart 8BValuation Is A Poor Timing Tool Globally Many factors have been used in conjunction with price-to-book by both academics and practitioners to time the rotation between value and growth. However, the results have been mixed. Regression models that correctly predicted in the past may not work in the future. For example, a regression model based on valuation spread and earnings-growth spread using data from January 1982 to October 1999 successfully predicted the rebound of value outperformance starting in early 2000,10 but the universal suffering of value funds over the past several years implies that this model may have given many false signals. Chart 9 demonstrates how difficult it is to use regression models as a timing tool for value and growth rotation. A simple regression is conducted between value and growth return differentials (subsequent 60-month returns) and relative price-to-book. For data from December 1974 to July 2019, the r-squared for the MSCI world is 0.38 and for the U.S. it is 0.09. In hindsight, both models predicted the value outperformance starting in early 2000. However, the gaps between actual value and fitted value started to open, long before 2000. By late 1998, the gaps were already wider than the previous cycle lows, yet they continued to widen as value continued to underperform growth until February 2000.  Chart 9How Good Is The Fit? What should investors currently do, based on these models? The gaps are large, but not as large as in early 2000. At which point should investors start to shift into value given its more than 12 years of underperformance? We have often written that we prefer to use sector and country positioning to implement style tilts.11, 12 This preference has not changed. Value and growth indices have sector tilts that change over time. Currently, the S&P Dow Jones large- and mid-cap value indices have a clear overweight in financials but an underweight in tech and health care compared to their growth counterparts (Table 6). Table 6Sector Bets In Value And Growth Indices* Chart 10Prefer Sector And Country Positioning To Style Tilts We have been neutral on value and growth, but would likely change this view if we change our country equity allocation between the U.S. and the euro area, and our equity sector allocation between cyclicals and defensives as well as between financials and information technology (Chart 10).     Xiaoli Tang, Associate Vice President xiaoliT@bcaresearch.com Footnotes 1Antti Ilmanen, Ronen Israel, Tobias J. Moskowitz, Ashwin Thapar, Franklin Wang, “Factor Premia and Factor Timing: A Century of Evidence,” AQR Working Paper, July 2, 2019. 2Eugene F. Fama and Kenneth R. French, “Common risk factors in the return on stocks and bonds,” Journal of Financial Economics, 33 (1993). 3Clifford Asness, Andrea Frazzini, Ronen Israel and Tobias Moskowitz, “Fact, Fiction, and Value Investing,” The Journal of Portfolio Management, Vol. 42 No.1, Fall 2015.  4Ronen Israel and Tobias J. Moskowitz, “The Role of Shorting, Firm Size and Time on Market Anomalies,”Journal of Financial Economics, Vol 108, Issue 2, May 2013 5Eugene F. Fama and Kenneth R. French, “A Five-Factor Asset Pricing Model,” Working Paper, University of Chicago, September 2014. 6Fama-French value-growth-size portfolios. 7Mark P. Cussen, “Value or growth Stocks: Which are Better?” Investopedia, Jun 25, 2019. 8Please see Global Asset Allocation Special Report titled “Small Cap Outperformance: Fact or Myth?” dated April 7, 2017, available at gaa.bcaresearch.com. 9Please see Global Asset Allocation Special Report titled, “Is Smart Beta A Useful Tool In Global Asset Allocation?” dated July 8, 2016, available at gaa.bcaresearch.com 10Clifford S. Asness, Jacques A Friedman, Robert J. Krail and John M Liew, “Style Timing: Value versus Growth,” The Journal of Portfolio Management, Spring 2000. 11Please see Global Asset Allocation Quarterly Portfolio Outlook, “Quarterly - March 2016,” dated March 31, 2016, and available at gaa. bcaresearch.com. 12Please see Global Asset Allocation Quarterly Portfolio Outlook, “Quarterly - April 2019,” dated April 1, 2019 available at gaa.bcaresearch.com.  

We are removing the large cap bias we have had on a tactical basis since our December 2018 High-Conviction Call report and booking gains of 9% (top panel). We are also setting a stop near the 10% return mark to protect cyclical profits since the May 7, 2018 inception of the large cap bias. Rising interest rates along with diminishing odds of an ultra-easy Fed in the upcoming September FOMC meeting have kept the dollar upbeat with some trade-weighted Fed indexes vaulting to all-time highs. Large caps have significant foreign sourced sales exposure and an appreciating currency will eat into profits, a headache that small caps do not have to sweat over. In addition, there are early signs that investors are beginning to treat small caps as trade war insulated companies anew, given their domestic focus. Bottom Line: While we are not ready to book cyclical profits in our large over small cap preference (please see this Weekly Report for more details),1 in the near term our confidence in additional large cap gains has decreased and we recommend removing the large cap bias from the high-conviction call list for a gain of 9% since inception.   1      Please see U.S. Equity Strategy Weekly Report, “Cracks Forming” dated June 24, 2019, available at uses.bcaresearch.com

Bearishness toward small vs. large caps has been pervasive over the past year, raising the question: Does it still pay to prefer large caps to small caps? The short answer is yes. Five key reasons underpin our large/mega cap preference in the size bias: First, a small cap margin squeeze has been underway since the 2012 cyclical peak. Simply put, small business labor costs are rising at a faster clip than overall wage inflation, warning that small cap profit margins have further to fall compared with large caps margins (middle panel). Second, relative indebtedness has been widening. Debt saddled small caps have been issuing debt at an accelerating pace at a time when cash flow growth has not been forthcoming. Small cap net debt-to-EBITDA is now almost three times as high as large cap net debt-to-EBITDA. Investors have finally realized that rising indebtedness is worrisome, especially at the late stages of the business cycle (bottom panel). Bottom Line: Small cap underperformance has staying power. Continue to prefer large/mega caps to their small cap brethren. Please see our most recent Weekly Report for the other three reasons why we believe small caps will underperform large caps.

Highlights Portfolio Strategy Melting inflation expectations, widening relative indebtedness, expensive adjusted relative valuations, high odds of a further drop in relative profit margins and the high-octane small cap status all signal that large caps continue to have the upper hand versus small caps. Modest deterioration in credit quality, weakening prospects for loan growth and falling inflation expectations, compel us to put the S&P bank index on downgrade alert. Recent Changes We got stopped out on the long S&P managed health care/short S&P semis trade on June 10 for a gain of 10% since inception. We got stopped out on the long S&P homebuilders/short S&P home improvement retailers trade on June 14 for a gain of 10% since inception. Table 1 Feature Equities surged to all-time highs last week, as investors cheered the Fed’s dovish stance and increasing likelihood of a late-July interest rate cut. The addiction to low interest rates and global dependence on QE are evident and simultaneously very worrisome signs. We are nervous that the U.S. economy is in a soft-patch, thus vulnerable to a shock (maybe sustained trade hawkishness is the negative catalyst) that can tilt the economy in recession. The risk/reward tradeoff on the overall equity market remains to the downside on a cyclical (3-12 month) time horizon as we first posited two weeks ago (this is U.S. Equity Strategy’s view and is going against BCA’s cyclically constructive equity market House View). In fact, using the NY Fed’s probability of a recession in the coming 12 months data series signals that there’s ample downside for stocks from current levels (recession probability shown inverted, Chart 1).1 We heed this message and reiterate our cautious equity market stance. Chart 1Watch Out Down Below Importantly, drilling deeper with regard to the excesses we are witnessing this cycle, Chart 2 is instructive and an unintended consequence of QE and zero interest rate policy. In previous research we highlighted the cumulative equity buybacks corporations have completed this cycle near the $5tn mark. Chart 2Financial Engineering What is worrying is that this “accomplishment” has come about at a great cost: a massive change in the capital structure of the firm. In other words, all of the buybacks are reflected in debt origination from the non-financial business sector (using the Fed’s flow of funds data), confirming our claim that the excesses this cycle are not in the financial or household sectors, but rather in the non-financial business sector (please refer to Chart 4A from the June 10 Weekly Report). One likely trigger of a jumpstart to a default cycle, other than a U.S./China trade dispute re-escalation, is dwindling demand. On that front, we are bemused on how much weight market participants place on the Fed’s shoulders bailing out the economy and the stock market. Chart 3 is a vivid reminder of this narrative. On the one side of the seesaw is the mighty Fed with its forecast interest rate cuts and on the other a slew of slipping indicators. Our sense is that these eighteen indicators will more than offset the Fed’s about-to-commence easing cycle and eventually tilt the U.S. economy in recession, especially if the Sino-American trade talks falter. S&P 500 quarterly earnings are contracting on a year-over-year basis and the semi down-cycle points to additional profit pain for the rest of the year (top panel, Chart 4). On the trade front, exports are below the zero line and imports are flirting with the boom/bust line (second panel, Chart 4). Overall rail freight, including intermodal (retail segment) freight is plunging and so is the CASS freight shipments index at a time when the broad commodity complex is also deflating (third & bottom panels, Chart 4). The latest Q2 update of CEO confidence was disconcerting, weighing on the broad equity market’s prospects (top panel, Chart 5). Non-residential capital outlays have petered out and private construction is sinking like a stone. In fact, the latter have never contracted at such a steep rate during expansions over the past five decades (second panel, Chart 5). Real residential investment has clocked its fifth consecutive quarter of negative growth during an expansion, for the first time since the mid-1950s. Single family housing starts and permits are contracting (third panel, Chart 5). Chart 4Cracks… Chart 5…Are… Light vehicle sales are ailing (bottom panel, Chart 5) and the latest senior loan officer survey continued to show that there is feeble demand for credit across nearly all the categories the Fed tracks (bottom panel, Chart 6). Non-farm payrolls fell to 75K on a month-over-month basis last month and layoff announcements are gaining steam signaling that the labor market, a notoriously lagging indicator, is also showing some signs of strain (layoffs shown inverted, third panel, Chart 6). The latest update of the U.S. Equity Strategy’s corporate pricing power gauge is contracting (please look forward to reading a more in-depth analysis on our quarterly update on July 2) following down the path of the market’s dwindling inflation expectations. Finally, the yield curve remains inverted (top and second panels, Chart 6). Chart 6…Forming Chart 7The “Hope" RallyAdding it all up, we deem that the equity market remains divorced from the economic reality and too much faith is placed on the Fed’s shoulders to save the day. Thus, we refrain from positioning the portfolio on “three hopes”: first that the Fed will engineer a soft landing, second that the U.S./China trade tussle will get resolved swiftly, and finally that the Chinese authorities will inject massive amounts of liquidity and reflate their economy (Chart 7). This week we are putting a key financials sub-sector on downgrade alert and update our view on the size bias. Large Cap Refuge While small caps shielded investors from the U.S./China trade dispute that heated up in 2018 (owing to their domestic focus), this year small caps have failed to live up to their trade war-proof expectations and have lagged their large cap brethren by the widest of margins. In fact, the relative share price ratio sits at multi-year lows giving back all the gains since the Trump election, and then some (Chart 8). Chart 8Stick With A Large Cap Bias As a reminder, our large cap preference has netted our portfolio 14% gains since the May 10 2018 cyclical inception and this size bias is also up 9% since our high-conviction call inclusion in early December 2018. Five key reasons underpin our large/mega cap preference in the size bias. Bearishness toward small vs. large caps has been pervasive raising the question: does it still pay to prefer large caps to small caps? The short answer is yes. Five key reasons underpin our large/mega cap preference in the size bias. First, melting inflation expectations have been positively correlated with the relative share price ratio, and the current message is to expect more downside (Chart 8). While the SPX has a higher energy weight than the S&P 600, financials and industrials dominate small cap indexes and likely explain the tight positive correlation with inflation expectations (Table 2). Table 2S&P 600/S&P 500 Sector Comparison Table Second, relative indebtedness has been widening. Debt saddled small caps have been issuing debt at an accelerating pace at a time when cash flow growth has not been forthcoming. Small cap net debt-to-EBITDA is now almost three times as high as large cap net debt-to-EBITDA. Investors have finally realized that rising indebtedness is worrisome, especially at the late stages of the business cycle, and that is why small caps have failed to insulate investors from the re-escalating trade dispute (top & middle panels, Chart 9). Third, a large number of small cap companies (100 in the S&P 600 and 600 in the Russell 2000) have no forward EPS. Very few S&P 500 companies have negative projected profits. Thus, while, relative valuations have been receding, the relative forward P/E trading at par is masking the relative value proposition of the indexes. Were the S&P or Russell to adjust for this, small caps would trade at a significant forward P/E premium to large caps (bottom panel, Chart 9). Chart 9Mind The Debt Gap Fourth, a small cap margin squeeze has been underway since the 2012 cyclical peak and the relative margin outlook is even grimmer. Simply put, small business labor costs are rising at a faster clip than overall wage inflation, warning that small cap profit margins have further to fall compared with large caps margins (Chart 10). Finally, small cap stocks are higher beta stocks and typically rise when volatility gets suppressed. As such, they also tend to outperform large caps when emerging markets outperform the SPX and vice versa. Tack on the recent yield curve inversion, and the odds are high that the size bias has entered a prolonged period of sustained small cap underperformance. Netting it all out, melting inflation expectations, widening relative indebtedness, expensive adjusted relative valuations, high odds of a further drop in relative profit margins and the high-octane small cap status all signal that large caps continue to have the upper hand versus small caps (Chart 11). Chart 10Relative Margin Trouble Chart 11Shay Away From Small Caps Bottom Line: Small cap underperformance has staying power. Continue to prefer large/mega caps to their small cap brethren. Put Banks On Downgrade Alert In the context of de-risking our portfolio we are taking the step and adding the S&P banks index on our downgrade watch list. The Fed’s signal of a cut in the upcoming July meeting steepened the yield curve last week. While the yield curve has put in higher lows in the past eight months, relative bank performance has been facing stiff resistance and has failed to follow the yield curve’s lead (Chart 12). One of the reasons for the Fed’s dovishness is melting inflation expectations. The latter are joined at the hip with relative bank performance and signal that downside risks are rising especially if the Fed fails to arrest the lower anchoring of inflation expectations (Chart 13). Chart 12Banks Are Not Participating Chart 13Melting Inflation Expectations Are Anchoring Banks With regard to credit demand, the latest Fed Senior Loan Officer survey remained subdued confirming the anemic reading from our Economic Impulse Indicator (a second derivative gauge of six parts of the U.S. economy, bottom panel, Chart 14). Lack of credit demand translates into lack of credit growth, despite the fact that bankers are, for the most part, willing extenders of credit. U.S. Equity Strategy’s overall loans & leases growth model has crested (second panel, Chart 15). Chart 14Anemic Loan Demand… Chart 15…Will Weigh On Loan Origination Similarly, the recent softness in a number of manufacturing surveys signal that C&I loan growth in particular – the largest credit category in bank loan books – is at risk of flirting with the contraction zone (third panel, Chart 15). Worrisomely, not only is the overall U.S. credit impulse contracting, but also U.S. Equity Strategy’s bank credit diffusion index is collapsing (second panel, Chart 16). Such broad breadth of loan growth deterioration warns that loan growth and thus bank earnings are at risk of underwhelming still optimistic sell-side analysts’ expectations (not shown). On the credit quality front there are now two loan categories that are starting to show some modest signs of stress. Credit card net chargeoffs and non-current loans are spiking and now C&I delinquent loans have ticked up for the first time since the manufacturing recession (third & bottom panel, Chart 16). Our bank EPS growth model does an excellent job in capturing all these forces and signals that bank EPS euphoria is misplaced (bottom panel, Chart 15). Nevertheless, despite these softening bank sector drivers there are four significant offsets. First the drubbing in the 10-year yield has been reflected nearly one-to-one on the 30-year fixed mortgage rate and the recent surge in mortgage applications signals that residential real estate loans (second largest bank loan category) may reaccelerate in the back half of the year (top panel, Chart 17). Chart 16Deteriorating Credit Quality Chart 17Some Significant… Second, while there have been credit card and C&I loan credit quality issues, as a percentage of total loans they just ticked higher and remain near cyclical lows, at a time when banks have been putting more money aside to cover for these potential loan losses (bottom panel, Chart 17). Third, bank source of funding remains very cheap as depositors have not been enjoying higher short term interest rates, at least not at the big money center banks. In other words, banks have not been passing higher interest rates to depositors sustaining relatively high NIMs (not shown). Finally, banks are one of the few sectors with pent up equity buyback demand. The upcoming release of the Fed’s stress test will likely continue to allow banks to pursue shareholder friendly activities, that they have been deprived from for so long, and raise dividend payments and increase share buybacks (Chart 18). Chart 18…Offsets In sum, melting inflation expectations, modest deterioration in credit quality, and weakening prospects for loan growth compel us to put the S&P bank index on downgrade alert. Bottom Line: We remain overweight the S&P banks index, but have put it on downgrade alert and are looking for an opportunity to downgrade to neutral. The ticker symbols for the stocks in this index are: BLBG: S5BANKX – WFC, JPM, BaAC, C, USB, PNC, BBT, STI, MTB, FITB, CFG, RF, KEY, HBAN, CMA, ZION, PBCT, SIVB, FRC.   Anastasios Avgeriou, U.S. Equity Strategist anastasios@bcaresearch.com Footnotes 1      https://www.newyorkfed.org/research/capital_markets/ycfaq.html Current Recommendations Current Trades Size And Style Views Favor value over growth Favor large over small caps