When building portfolios, one strategy is to use value stocks to help balance out some of the potential risk of more growth-oriented investments. But some value stocks don’t always provide the balance advisors are looking for.

Attempts at finding value can fall short in three ways:

• Dividend stocks, which can help reduce volatility and provide downside resilience in a portfolio, are often left out.
• Quality companies aren’t necessarily a focus.
• Volatility isn’t always reduced.

For example, when looking at stocks in the Russell 1000 Value Index:

• Nearly a quarter of those companies had an average dividend yield at or near 0% in 2020.¹
  
• 44% of the rated companies in the index were rated BBB- or lower, as of June 30.²
• Ratings for all three common risk measures — standard deviation, downside capture and average drawdown — were either the same or higher than the Standard & Poor’s 500 Index as of June, thereby not providing any reduction in volatility.¹

Over the last decade, the performance of U.S. value stocks has lagged that of domestic growth stocks, which generally see revenue and earnings increase at a faster rate than those of value stocks.³ (The disparity between the Russell 1000 Growth and Russell Value indexes has been wide in recent years, and that difference has accelerated since the bear market lows in March.)

But COVID-19 vaccines are now being deployed, an effort that is supporting a stock market rally on hopes that world economies might be able to resume some sort of normal activity in 2021. This could create an environment that supports a pivot to value stocks. Historically, value stocks have posted their strongest returns in the recovery phase of an economic cycle.⁴

To see if the value stocks in your clients’ portfolios are playing their intended role and for tips on how to use a selective approach when investing in stocks, consider scheduling a portfolio consultation with a Capital Group specialist.

_{¹Morningstar Direct
²Bloomberg
³Growth vs. Value Disparity, Commonwealth Financial Network, August 19, 2020.
⁴Will Value Managers Ever Catch a Break? FundFire, December 1, 2020.}