Despite the intensity of the value rebound in 2022, the fundamental case for value to outperform growth in the coming years remains strong.  The value performance pause in 2023 offers investors an opportunity to rebalance their value and growth exposures. That said, the “easy part” for value outperformance (bluntly picking value stocks with cheap valuation ratios) may be behind us, and a more selective approach may be warranted in the future.

Long-term investors have steadily been drawn to buying underpriced companies and patiently waiting for them to increase in value.  However, among the cheapest companies there are some that have very good reasons to remain underpriced, some whose debilities have not yet been fully reflected in the price, and some that are on their way to insolvency.  These “value traps” with long downside tails represent a cost to value portfolios, weakening risk-adjusted (and absolute) returns.  An investment strategy that succeeds in avoiding most of these traps provides better upside potential over time, allowing investors to achieve more concentrated yet less risky exposure to the least expensive stocks.