Equity

Why Now May Be An Opportune Time For Active Value.

A balance holding plus and minus blocks against a blue wall
Nov 21, 2024|ByJay Jacobs

Key takeaways

  • Market breadth has widened beyond mega cap tech stocks, driving the outperformance of value over growth stocks in Q3 2024
  • Many investors have limited exposure to value, as it is a smaller portion of the broad market benchmarks than one might expect
  • Complementing exposure to Core US equities with an actively managed large cap value strategy can help balance one’s style exposures, while potentially generating alpha in a category where active managers have had historical success

Market leadership has broadened beyond mega cap tech stocks

The Russell 1000’s performance this year has largely been fueled by a handful of mega-cap stocks, specifically the tech-focused “Magnificent Seven,” which includes Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Telsa.1 Together, these companies make up over 25% of the Russell 1000 and contributed approximately 40% of the index’s 21% total return during the first three quarters of 2024.2 Yet, in more recent months, market breadth has widened, with value-oriented stocks taking the lead. In Q3, the Russell 1000 Value Index (R1000V) rose 9.4% compared to 3.2% for the Russell 1000 Growth Index (R1000G).3

Several factors may have contributed to this rotation into value. One is greater investor confidence due to strong jobs growth, falling inflation, and the onset of the Fed’s rate-cutting cycle, helping stock performance broaden beyond just the largest mega-cap companies. Another is that rate-sensitive value sectors such as financials, utilities, and REITs tend to benefit from lower interest rates.4

Valuations may also have played a role. Growth stocks have been priced at historically high multiples. The Russell 1000 Growth Index has been trading at a price-to-earnings ratio or P/E5 of 32.8x, well above its 15-year average of 25.0x. By contrast, the Russell 1000 Value Index has been trading at 18.6x forward earnings—which reflects the price relative to projected earnings—only slightly above its 15-year average of 18.1x.6 This widening valuation gap between growth and value may be drawing investors towards value stocks. In December 2000, the last time the gap reached these levels, value stocks significantly outperformed growth over the subsequent 1-, 3-, and 5-year periods.7

The chart compares the price-to-earnings (P/E) ratios of the Russell 1000 Growth and Russell 1000 Value indices.

Source: Factset as of 9/30/2024. The price-to-earnings (P/E) ratio is a fundamental measure used to determine if an investment is valued appropriately. Each holding's P/E is the latest closing price divided by the latest fiscal year's earnings per share. Past performance does not guarantee future results. Forward-looking estimates may not come to pass.

Rotations between growth and value leadership are difficult to predict and occur often, changing 27 times since 2000.8 In our view, these nearly annual occurrences underscore the importance of a balanced approach between growth and value exposure in a portfolio to position for different market conditions.

The chart compares 1-year trailing returns of the Russell 1000 Value and Russell 1000 Growth indices since 2000.

Source: Morningstar as of 9/30/24. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Value is underrepresented in the S&P 500 compared to historical norms

One unintended consequence of recent market dynamics heavily favoring growth and tech stocks, until recently, has been the diminishing representation of value within U.S. large cap indexes. As of September 30, 2024, growth made up 32% of the Russell 1000, while value accounted for just 8%, a notable 24.0% difference. This contrasts sharply with the past 25 years, where the average market weight differential between growth and value stocks in the Russell was 7.4%.9 In our view, this concentration has inadvertently left many portfolios under-diversified and underexposed to value stocks, putting investors at risk of missing potential upside as value rallies. We believe investors should consider intentionally upweighting exposure to value stocks by complementing core US equity index funds with a dedicated value allocation.

The chart illustrates the weight distribution between growth and value stocks within the Russell 1000 index.

Source: BlackRock as of 9/30/24. Past performance does not guarantee future results.

Active managers have fared well in Large Value Category

Over the past five years, over 50% of active value managers have beaten the Russell 1000 Value Index, compared to just 7.9% of active growth managers surpassing the Russell 1000 Growth Index. On average, value managers generated 4 basis points10 of excess returns, and outperforming active managers delivered 172 basis points of excess returns.11

The chart highlights that active managers have fared well in the Large Cap Value category.

Source: Morningstar as of 9/30/24. The results shown in the table are based on all actively managed mutual funds and ETFs within the large-cap categories.

When market performance is driven by a few dominant stocks, it can become challenging for active managers to keep up with index returns unless they hold significant positions in these key stocks. This is the case for indexes that include the “Magnificent Seven” stocks, which have delivered a combined annualized return of 46% over the past five years, compared to just over 13% for the broader S&P 500.12

But for value managers, the landscape may be different. The Russell 1000 Value Index, with 878 stocks as of 9/30/2024—over twice the number in the Russell 1000 Growth Index—could offer a broader and more diversified universe.13 This larger pool can provide value managers the latitude to find potential alpha-generating opportunities, while remaining benchmark-aware. The absence of high concentration growth stocks in the value benchmark can also allow managers to pursue differentiated investment strategies without the pressure of holding these names to stay aligned with the benchmark.

As investors consider adding a dedicated value allocation to complement broad market exposures, an actively managed large-cap approach may help balance factor exposures and enhance returns through stock selection.

Conclusion

Investors may want to consider pairing a core U.S. equities with an actively managed large-cap value strategy, like the BlackRock Large Cap Value ETF (BLCV), to upweight value exposure. Managed by BlackRock’s Global Fundamental Equities CIO, Tony DeSpirito and the Income & Value Team, BLCV applies a disciplined, research-driven approach to identifying quality, undervalued stocks in the large-cap value space. Focusing on strong fundamentals, the team seeks to capitalize on pricing inefficiencies by selecting companies they believe are trading below their intrinsic value.

The active management of BLCV may allow for more flexibility as the team can dynamically adjust the portfolio in response to market conditions, valuations, and emerging opportunities. This may be advantageous in volatile or shifting market environments, where a manager’s expertise in stock selection and risk management can potentially add value beyond benchmark performance.

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Jay Jacobs
U.S. Head of Thematic and Active ETFs at BlackRock
Jay Jacobs is the U.S. Head of Thematic and Active ETFs at BlackRock. In this role, Jay oversees the overall product strategy, thought leadership, and client engagement for the firm's thematic and active ETF business. Jay is also responsible for BlackRock's international ETF suite.

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