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Why Value Stocks Have Disappointed

The primary reason value investing has lost its mojo is not because stock buyers are behaving any differently, but because companies are

After reliably and consistently beating growth companies for decades, lower-priced stocks have lost their edge. Since the mid-1990s, value stocks have roughly matched growth stocks' returns, and during the trailing 10-year period they have lagged.

In his most recent quarterly letter, Jeremy Grantham, co-founder of the money-management firm GMO, discusses why value investing has struggled. The letter is unusual in that Grantham is himself a value investor, and his organization's funds are suffering net redemptions. Fund executives who find themselves on the wrong side of the financial markets tend to defend their investment approach, not question it.

Instead, Grantham grants that this time might indeed be different. In particular, corporate profits have transformed. Grantham provides the return-on-sales figures for the S&P 500, dating back to 1970. For the first half of the period, the ROS hovers between 4% and 6%. It's artificial to draw a line at 5%, which Grantham does, as if that number represents the sequence's natural midpoint. However, such an exercise does capture the previous spirit of the ROS' behavior.

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About Author

John Rekenthaler, CFA  John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.

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