Experts Spent Years ‘Angst-ing’ Over Value. In the End, the Answer Was in the Textbook.

“The answer was there. It was right in front of us,” says Prudent’s Daniel Berkowitz.

Illustration by II

Illustration by II

The debate about whether value investing — i.e., buying cheap stocks — still worked, or why the style had been underperforming, has engaged the smartest people in finance for more than a decade. When value finally snapped back more than a year ago (depending on the measure used), the answer to its long stumble turned out to be fairly simple — and plucked directly from the textbook.

For one, blame the Federal Reserve’s and other global central banks’ easy monetary policies, which kept interest rates at record lows for more than a decade.

“The vast majority of the outperformance of growth and the underperformance of value was indeed the result of central bank monetary policy,” said Michael Hunstad, chief investment officer for global equities at Northern Trust Asset Management. “It was all predicated on low interest rates and a huge amount of liquidity.”

When the macro environment changed and inflation reappeared, so did value. “It was right on cue,” said Hunstad. “People thought rates would remain low for years to come. Then inflation hit, rates rose, and quantitative easing was reduced. You could have almost pegged that [as] a textbook case of when value outperforms. And in fact it did,” he said.

According to Northern Trust, so-called value supercycles last an average of 12 years, with an average outperformance of 3.8 percent a year.

Daniel Berkowitz, senior investment officer at Prudent Management Associates, said that the expansion of the Fed’s balance sheet, rock-bottom interest rates, and abundant liquidity left investors with no other option (a situation known in popular parlance as “TINA” — There Is No Alternative) but stocks. “At a minimum, investment risk appetites pushed folks into the higher growth investments.” Looking back on the debate, Berkowitz said that the majority of experts would agree that easy monetary policy “at least contributed to the underperformance of value.”


Wes Crill, head of investment strategists at Dimensional Fund Advisors, said that data can only tell people so much about extreme tail events. For example, during the first quarter of 2020, when economies were distorted by the onset of the pandemic, value underperformed growth by about 30 percentage points, he said.

But value had been underperforming for a decade. The years between 2010 and 2020 were highly unusual, with FANG stocks, the “poster child” for large technology growth stocks, returning an annualized 30 percentage points. “FANG stocks and growth stocks generally had valuations that were getting higher and higher,” said Crill. The absolute returns of value were in line with their historical average, but growth was far exceeding its historical average over that period. “There wasn’t anything wrong with value. It was potentially abnormally strong performance from growth stocks.”

Berkowitz added that the behavioral explanation for how the value premium works — investors overpay for growth stocks — played out like clockwork. “The behavioral explanation does link back to monetary policy, [which] supercharged investors’ risk appetite and led people to overpay for growth stocks. “The answer was there. It was right in front of us.”