By: Catherine Yoshimoto, Senior Index Product Manager
Although the Federal Reserve held off on raising rates at their last meeting, their October 28 policy statement has many expecting the long-awaited rate hike to happen at their next meeting in December. If the rate increase should materialize, could it signal a shift in style index leadership, where after a long period of outperformance growth indexes will now take a back seat to value? While the future still remains unseen, a look at historical performance of Russell Pure Style Indexes can shed some light on whether value stocks might be poised for a comeback.
Institutional investors have increasingly embraced Russell Style Indexes since their launch in 1987. In fact, 99% of all U.S. institutional equity style products are now benchmarked to a Russell Style Index.1 In 2015, the Russell Pure Style Indexes were developed as “Smart Beta” indexes based on the widely adopted Russell Style Index methodology. The Russell Pure Style Indexes are focused indexes that include stocks that exhibit the strongest growth or value signals; stocks are weighted in accordance with their composite value scores (CVS).
As of the fourth quarter of 2015, Russell Pure Growth indexes have outperformed Russell Pure Value indexes for an extended period. As markets recovered in the years following the Global Financial Crisis, the Russell Top 200, Midcap and 2000 Pure Growth indexes outperformed each of their Pure Value counterparts over the 1-, 3-, 5- and 10-year periods ended October 31, 2015. It should also be noted that the Fed struck a decidedly dovish tone during this time period, not having raised rates since 2006 and holding rates to near zero since 2008.
Going further back in time we can see that, indeed, the Russell Pure Growth indexes did not always outperform the Russell Pure Value indexes: Over the 15 years ended October 31, 2015, each of the Russell Pure Value indexes outperformed its respective Russell Pure Growth index, prompting the question whether Pure Value indexes are due for a comeback following an extended period of Pure Growth index leadership, and how the Russell Pure Style indexes may perform if and when the Fed hikes rates.
Source: FTSE Russell, as of October 31, 2015.
Past performance is no guarantee of future results. Returns shown may reflect hypothetical historical performance. Please see the end for important legal disclosures. The inception date of the Russell Pure Style Index series is April 7, 2015. Returns provided for each Russell Pure Style Index may include data for periods prior to when each Russell Index was in live production. Hypothetical historical returns for these Russell indexes prior to the live production date are calculated using the same Russell methodology; however, application to the performance calculation may vary due to data sources, corporate actions and the availability of historical data with respect to certain securities.
Since their introduction, Value and Growth index leadership has rotated in different market conditions. Immediately following historical rate increases, Value indexes on average responded less negatively than Growth indexes (both styles on average also recovered by six months following the Fed rate hikes).2 Based on the Pure Style indexes, during the previous period in which the Fed increased the Fed Funds Target Rate from 1% to 5.25%, the Russell Pure Value Indexes outperformed their respective Pure Growth indexes.
Source: FTSE Russell. Data as of October 31, 2015
Past performance is no guarantee of future results. Return shown may reflect hypothetical historical performance. Please see the end for important legal disclosures. The inception date of the Russell Pure Style Index series is April 7, 2015. Returns provided for each Russell Pure Style Index may include data for periods prior to when each Russell Index was in live production. Hypothetical historical returns for these Russell indexes prior to the live production date are calculated using the same Russell methodology; however, application to the performance calculation may vary due to data sources, corporate actions and the availability of historical data with respect to certain securities.
With the market’s growing confidence in an impending Fed rate hike, the performance of the Russell Pure Value indexes rebounded more strongly than that of the Russel Pure Growth indexes. For the period from September 1, 2015 to November 18, 2015, the Russell Pure Value indexes have outperformed their Russell Pure Growth counterparts, especially in the small and mid cap segments.
Source: FTSE Russell, data as at November 18, 2015.
Past performance is no guarantee of future results. Please see the end for important legal disclosures.
While it remains yet to be seen how U.S. value stocks will perform in the next rising rate environment or when the Fed will next raise interest rates, investors can continue to monitor the performance of distinct styles for different U.S. market cap segments using the Russell Pure Style Indexes.
 U.S. Equity Indexes: Institutional Benchmark Survey. Russell Indexes 2014 Annual Benchmark Survey. Russell Research.
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