Co-authored with Emma Rapaport, editorial manager, Morningstar.com.au

One of the big themes of the year so far has been the value comeback. What is behind this resurgence after a pretty dismal period?

Mathieu Caquineau, an analyst with Morningstar's manager research team, says the value rally for stocks started in last November when market participants started to price in a stronger than expected economic recovery partly based on vaccines, partly based on stimulus. The value rebound continued this year but has seesawed from week to week.

If you look at the past six months, the Russell Top 200 Growth TR Index is up 12.93 per cent whereas the Russell Top 200 Value TR Index is up 21.48 per cent in the same period. Value stocks tend to be economically sensitive. Energy, commodities, bank stocks have led the rally.

Investment Growth $10k 6-Mth | US Market Indexes by Style

Source: Morningstar

Caquineau says this short-term outperformance has not erased the large advent of growth funds versus value funds over the past decade.

"It has been such a difficult decade for value managers," he says. "It's going to take much more than a six months' outperformance to look good again. But any signs of rebound are fuelling hope that value is indeed back for good."

Whether or not it’s back long-term is still a question mark. Over the past decade, value had a few episodes of short-lived rebounds, notably 2016, but none lasted very long. Caquineau notes however that style work in cycles.

"We have clearly been in a growth cycle for so long that now valuation for some growth stocks look stretched," he says. "Everything is in place for value to be back, especially if we see a stronger than expected economic recovery that could boost the earnings outlook for value stocks. But there is no certainty.

Periodic Table 10-Yr | US Market Indexes by Style

Source: Morningstar

He adds: "I think it makes sense for investors to look at their portfolios, see if they have an appropriate diversification in terms of style. If you've let your winners run in recent years, you might have a bigger, much bigger allocation to growth managers than what is desirable from a risk management standpoint."

When it comes to selecting value funds, Caquineau notes that it is not just about choosing any growth fund or a value fund. It's about choosing a good manager that can deliver. Value investing is not as easy as you might think. Here are some equity strategies Morningstar analysts rate highly.

MORE ON VALUE UNDERPERFORMANCE:

  • Value investing: A deep dive into performance
  • Value managers on why the strategy has underperformed
  • What do the top value funds have in common?

Medalist value-style funds (unlisted)

Morningstar’s preferred manager in the Australian large-cap space is Investors Mutual.

Medalist value-style funds (listed)

Among listed funds, analysts prefer three managers – Platinum, Vanguard and BetaShares.