Value Stocks Lose Steam But Active Managers Stay Afloat

Value stocks have lost steam in early 2017 as market exuberance faded and investors reappraised the risks of trade wars. The renewed underperformance of value stocks has taken many investors by surprise as it follows a sharp rebound in the last quarter of 2016. The January reversal has been particularly abrupt in the U.S. The MSCI USA Value underperformed the market by 2% and the MSCI USA Growth by 4%.

Active investors have nonetheless been able to stay afloat. Based on a sample of 86 value funds invested in the U.S., we find that the majority outperformed their benchmark in January. In Europe, we find a similar proportion of value biased mutual funds outperforming last month. Yet, the recent success of active investing is too short to draw robust conclusions.

During recent years, funds with a value or growth bias systematically underperformed their benchmarks, in particular in the U.S. (see chart below). Such developments also highlight the fact that 2017 will, in our opinion, remain a challenging year for investors. Political risks loom large in Europe and policy uncertainty is elevated in the U.S. Although we believe that value investing has the potential to regain strength in the coming months, we also believe that the margin of error is significant and such risks need to be diversified.

With regards to hedge fund performance, we discussed in the previous edition of this report the fact that January saw mixed returns (-0.4%). In particular, trend reversals negatively impacted CTAs (-2.9% in January). During the first week of February, hedge fund performance improved markedly. The Lyxor hedge fund index was up 0.4% last week and all strategies were in positive territory. Event Driven outperformed (0.5% last week) on the back of the solid returns delivered by Special Situations funds. It is also interesting to note that market neutral L/S Equity managers are faring much better now compared to last year.

Finally, the best performing hedge fund in our sample year to date is an Asian credit fund, up 6.2% and a L/S Equity manager with a value bias, up 3.7%. On the negative side, long term CTAs underperformed, but some short term and medium term CTAs are up 2% year to date.