Value versus growth: A rising opportunity overseas?

Historically, value has outperformed growth over the long term whether among domestic or international equities, or large-caps or small-caps.1 The chart below illustrates the long-term outperformance of the MSCI EAFE (Europe, Australasia, Far East) Value Index versus the MSCI EAFE Growth Index since inception of the indices.

Amid this long-term trend, we find international value investments currently offer attractive low valuations and a yield premium. As of June 30, 2020, the MSCI EAFE Value Index had a price-to-earnings (P/E) ratio of 11.34 and a dividend yield of 2.95%, compared with a P/E ratio of 26.25 and dividend yield of 1.62% for the MSCI EAFE Growth Index.2

Long-term capital appreciation

Growth of $100,000 from Dec. 31, 1974-June 30, 2020

Long-term capital appreciation Graph

Past performance does not guarantee future results.
Source: Morningstar, for the period Dec. 31, 1974 to June 30, 2020. Charts shown throughout are for illustrative purposes only and not meant to predict actual results. Chart is for illustrative purposes and is not representative of the performance of any specific investment.

1Source: Fama and French, et al­.
2Source: MSCI: MSCI EAFE Value Index; MSCI EAFE Growth Index.

What this means for investors

Given the historical perspective of the long-term outperformance of value, combined with the seemingly attractive valuations currently available in international value, we believe now may be an especially good time for US investors to consider adding to their exposure in international value equities.


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IMPORTANT RISK CONSIDERATIONS

Nothing presented should be construed as a recommendation to purchase or sell any security or follow any investment technique or strategy.

Investing involves risk, including the possible loss of principal.

Past performance does not guarantee future results.

The views expressed represent the investment team’s assessment of the market environment as of July 2020, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice.

International investments entail risks including fluctuation in currency values, differences in accounting principles, or economic or political instability. Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility, lower trading volume, and higher risk of market closures. In many emerging markets, there is substantially less publicly available information and the available information may be incomplete or misleading. Legal claims are generally more difficult to pursue.

Value investing focuses on buying stocks that are trading at bargain prices based on fundamental analysis, then holding them until they become fully valued.

Typically, value investors select securities with lower-than-average price-to-book or price-to-earnings ratios and/or high dividend yields.

Market risk is the risk that all or a majority of the securities in a certain market – like the stock market or bond market – will decline in value because of factors such as adverse political or economic conditions, future expectations, investor confidence, or heavy institutional selling.

The MSCI EAFE (Europe, Australasia, Far East) Growth Index is a subset of the MSCI EAFE Index, which represents large- and mid-cap stocks exhibiting overall growth style characteristics across developed market countries around the world, excluding the United States and Canada. The growth investment style characteristics for index construction are defined using five variables: long-term forward EPS growth rate, short-term forward EPS growth rate, current internal growth rate and long-term historical EPS growth trend and long-term historical sales per share growth trend.

The MSCI EAFE (Europe, Australasia, Far East) Value Index is a subset of the MSCI EAFE Index, which represents large- and mid-cap stocks exhibiting overall value style characteristics across developed market countries around the world, excluding the United States and Canada. The value investment style characteristics for index construction are defined using three variables: book value to price, 12-month forward earnings to price and dividend yield

Index performance returns do not reflect any management fees, transaction costs, or expenses. Indices are unmanaged and one cannot invest directly in an index.

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