Market Update: Why Value, Why Now?

The S&P 500 Index reached new record highs in the weeks following the 2016 U.S. elections, and the Dow Jones Industrial Average finished above 20,000 for the first time ever on January 25, 2017. In a marked reversal of fortunes, U.S. value stocks outperformed their growth counterparts for a substantial part of 2016, and looked set to continue the trend into 2017.

However, markets hit the pause button on the Trump-driven reflation trade in March. Flip-flopping on budget conditions and trade policies and two failed attempts to repeal Obamacare appear to have undermined the market’s confidence in the administration’s ability to expediently pass bills to lower taxes and raise infrastructure spending.


Calendar Year Returns

INDEX NAME 2010 2011 2012 2013 2014 2015 2016 YTD[1]
Russell 1000 Value Index (USD) 15.51% 0.39% 17.51% 32.53% 13.45% -3.83% 17.34% 4.66%
Russell 1000 Growth Index (USD) 16.71% 2.64% 15.26% 33.48% 13.05% 5.67% 7.08% 13.99%
Winner Growth Growth Value Growth Value Growth Value Growth


Don’t Give Up on Value Yet

Value may be lagging, but we still believe the trend can reverse. Why?


The broad equity market is expensive.

The S&P 500 is trading at a forward P/E of 18.61x, vs. the 10-year (actual) average of ~17x – and growth stocks are even pricier, at 21.67x[2]. Against this backdrop, the portfolios of our two U.S. value-oriented funds – Purpose Tactical Hedged Equity Fund (PHE/PHE.B) and  Purpose Enhanced US Equity Fund (PEU/PEU.B) – appear attractively priced, trading at an average forward P/E of 12.99x[2].

In addition, the U.S. economy is in good shape, regardless of whether campaign promises are implemented…

Value may be lagging, but the U.S. is still churning out positive economic data. This is particularly true on the employment front (the U.S. unemployment rate fell to 4.3% in May 2017, the lowest jobless rate since 2007).

In addition, the S&P 500 earnings growth for the first quarter of 2017 surprised mostly (75%) to the upside, and cuts to Q2 EPS forecasts were the smallest recorded in three years. If corporations do eventually benefit from the promised tax cuts, EPS growth could continue to expand. With profit growth spread relatively widely, investors will likely opt for less expensive forms of growth.

…But if some of the U.S. administration’s long-stated goals do meet success, it could be the catalyst for another value run.

The early setbacks to the Obamacare repeal and the perceived negative events shadowing the White House caused markets to retrench. However, the bill to repeal (and replace) the Dodd-Frank Act appears to be moving ahead. It passed the House in early June, and is now before the Senate. Should it pass, it could be a big win for value – particularly financials. The scale-back includes the elimination of the Volcker Rule and reductions in capital and liquidity requirements. This is likely to generate significant additional revenue and free up unproductive capital.


Ideas with Purpose: Our Value Proposition

Over the long term, relative value and quality are two factors that have tended to historically outperform. Given our favourable outlook, we think now is the time to re-focus on Purpose’s value solutions:

  • Purpose Tactical Hedged Equity Fund/ETF– FX-hedged (PHE) / non-FX-hedged (PHE.B). Conservative investors looking for a risk-managed way to participate should consider this portfolio of high-quality U.S. value stocks that tactically hedges market risk based on momentum trends of the S&P 500 Index. A non-FX-hedged version – PHE.B – is also available for clients who want exposure to currency returns.
  • Purpose Enhanced US Equity Fund/ETF– FX-hedged (PEU) / non-FX-hedged (PEU.B). With its ability to invest up to 130% of its NAV in U.S. value stocks while maintaining market-level risk, PEU is an excellent choice for investors looking for an enhanced way to participate in the U.S. value rally. A non-FX-hedged version – PEU.B – is also available for clients who want exposure to currency returns.


How We Stack Up[3]

PHE/PEU S&P 500 Index
Price to Earnings ratio 12.99x 18.61x
Price to Cash Flow ratio 8.53x 13.30x
Price to Book Value 3.03x 2.97x
Dividend Yield (Gross) 2.45% 2.03%


1Source: Bloomberg L.P., as at June 30, 2017.

2Source: Bloomberg L.P.; all data as at June 30, 2017. Value stocks as measured by the Russell 1000 Value Index (USD); growth stocks as measured by the Russell 1000 Growth Index (USD).

3Source: Bloomberg L.P., Purpose Investments, as at June 30, 2017.




Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.

Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties. Actual results, actions or events could differ materially from those set forth in the FLS.

FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments [and the portfolio manager] believe to be reasonable assumptions, Purpose Investments [and the portfolio manager] cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.


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