Quarter in Review
Equities continued their ascent, albeit muted compared to the prior quarter.
The Russell 3000 Index advanced 1.4%, as the Russell 1000 Index increased 1.8%. while the Russell 2000 Index declined 7.2%.
The MSCI All-Country World Index ex-USA (AWCI x-USA), rose 0.5% as the MSCI EAFE Index advanced 0.8% while the MSCI Emerging Markets Index declined 0.4%.
Value materially outperformed Growth, as the Russell 3000 Value and Growth indexes advanced 2.3% and 0.5%, respectively. The ACWI x-USA Value Index increased 3.5%, while Growth declined 2.5%.
Year-to-date (YTD), the Russell 3000 Index returned 12.4% as small caps outpaced large caps 13.7% versus 12.3%, respectively. ACWI x-USA returned 14.2% YTD as emerging markets surged 23.4% YTD, while developed markets advanced 10.3% YTD.
The Fork in the Road
We’ve previously commented on “factors” (the drivers of risk and return). To analyze this trend of Value over Growth we evaluated the MSCI Enhanced Value Indexes, specifically for the USA and EAFE. MSCI employs three variables: price-to-book value, price-to-forward earnings and enterprise value-to-cash flow from operations.
The MSCI USA Enhanced Value Index outperformed the broader USA Index 47.2% YTD versus 12.6% YTD.
Of the top 10 index constituents, which represent 46.1% of the overall index, five are within the Information Technology sector.
Given the variables mentioned, this index appears to be at a discount versus the MSCI USA Index, with a price-to-book value (P/BV) of 2.5x versus 5.7x and price-to-forward earnings (P/E FWD) of 9.5x versus 19.4x.
Similarly, the MSCI EAFE Enhanced Value Index outperformed the broader EAFE Index 16.5% YTD versus 10.3% YTD.
The MSCI EAFE Enhanced Value Index is less concentrated than the USA index. Its top 10 constituents represent 20.6% of the overall index, as both Financials and Health Care represent the largest exposures with three companies each whose combined constituent weight is 6.6% and 5.7%, respectively.
This index appears to be at a discount versus the MSCI EAFE Index, with a
P/BV of 1.2x versus 2.3x and a P/E FWD of 10.1x versus 14.8x.
Will Value continue its outperformance? Relative valuation appears to be supported by analyst estimates for both earnings and revenues. According to I/B/E/S, earnings for the MSCI USA Index are projected to grow 17.5% year-over-year (YOY) with revenue growth of 9.5% YOY. Its P/E FWD stands at 18.7x while its price-to-earnings growth (PEG) is 0.4, a discount to fair value.
For the MSCI EAFE Index, earnings are projected to grow 10.4% YOY with revenue growth of 3.6% YOY. Its P/E FWD stands at 14.2x while its PEG is 0.6, a discount to fair value.
All Things Being Equal
Our process melds numerous analytical inputs including quantitative, fundamental, qualitative, and technical analysis when evaluating opportunity to manage risk and capture relative returns. We consistently and continuously apply our process to capture attractive risk-adjusted returns.
The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.
This content is provided for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and should not be interpreted as investment, tax, legal, and/or financial planning advice. All investments involve risk, including the possible loss of principal. Investments are not FDIC insured and may lose value.