Rob Arnott: Value has tended to outperform growth most of the time, probably about six out of every ten years. Not by a huge margin, but fairly reliably over time. This past decade was an anomaly. If you look back at the period from 2007 to 2015, that was a nine-year bear market for value relative to growth. The only thing comparable to it was the period of the 1990s, culminating in the tech bubble. That was the only period of time in history in which value underperformed growth for a period of time as long or to an extent, as large or larger than what we just saw. So this really represents an extraordinary opportunity. Value relative to growth is unusually stretched.
Let's consider this exhibit. This exhibit shows the relative price of value stocks relative to growth stocks based on price to book value from over the last 20 years, and you can see it ranges from .08 to .27, which basically means that value is anywhere from one-twelfth the price of growth to a little bit above one-fourth the price of growth. When it's one-twelfth the price of growth, it's really cheap.
That's what the situation was at the peak of the tech bubble. And of course people were bailing out of value left and right. What a horrible time to sell value. Seven years later in 2007 it was at .27, less than a four to one difference between growth and value. Value was trading rich. And that laid a foundation for the nine-year bear market in value relative to growth that we just saw.
By early 2016 we were back down to .13, an eight to one valuation ratio for growth relative to value. Value was again trading cheap, in fact, cheaper than at any time in history other than the tech bubble. So this is cheap enough that it can lay a foundation for a multiyear bull market in value relative to growth. In fact, this relationship is even more stretched outside of the US.
Because of its value orientation, this leaves RAE in a particularly good position to add value in the years ahead. Now, after a very good year in 2016, the opening quarter of 2017 saw value pull back again a little bit. We're in an industry where people view disappointment, view a pullback in performance with disappointment.
It's an opportunity. It's a buying opportunity.