Yield: Pumping the Brakes on Growth Stocks

The recent upward march of yields on the 10-year Treasury may be welcome news to value investors. As you can see in the chart below, after peaking in 2006 yields spent the next 10 years drifting lower. The movement had a spillover impact on equities with investors abandoning value stocks and piling into growth stocks.
 
The logic behind the correlation between Treasury yields and value vs. growth is straightforward: 
 
  • Low yields are seen as forecasting a tepid economy, which in turn leads investors to gravitate toward faster-growing companies they think will be able to produce earnings when others struggle.
  • Conversely, rising yields usually reflect economic optimism which should translate to widespread growth. When sales growth is plentiful, more investors tend to focus on making sure they aren’t overpaying for growth. In short, attractive valuations matter more.
The Yield-Value Connection
Heartland Advisors Value Investing 10-Yr Treasury vs. R3V Less R3 Chart


Source: FactSet Research Systems Inc. and Russell®, 9/30/2003 to 9/28/2018
All indices are unmanaged. It is not possible to invest directly in an index. 
Past performance does not guarantee future results.

While the initial upturn in yields in 2016 provided little relief for value investors, we believe now that rates have consistently held above 3%, the rotation toward attractively priced equities could accelerate.

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Author

Heartland Advisors Value Investing Portfolio Manager Colin McWey

Colin McWey

McWey, CFA, is Vice President and Portfolio Manager of the Select Value and Mid Cap Value Funds and their corresponding separately managed account strategies. He has 16 years of industry experience, 9 at Heartland.

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Supplemental Information for Chart (calendar year annual returns %):

    2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD 2018*
Russell 3000® Growth Index   30.97 6.93 5.17 9.46 11.40 -38.44 37.01 17.64 2.18 15.22 34.24 12.44 5.09 7.39 29.59 16.99
Russell 3000® Value Index   31.14 16.94 6.85 22.34 -1.01 -36.25 19.76 16.23 -0.10 17.56 32.69 12.69 -4.13 18.40 13.19

4.17

*As of 9/30/2018
Source: FactSet Research Systems Inc. and Russell®

Past performance does not guarantee future results.

Investing involves risk, including the potential loss of principal.

There is no guarantee that a particular investment strategy will be successful.

Value investments are subject to the risk that their intrinsic value may not be recognized by the broad market.

The statements and opinions expressed in the articles or appearances are those of the presenter. Any discussion of investments and investment strategies represents the presenters' views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. Any forecasts may not prove to be true.

Economic predictions are based on estimates and are subject to change.

Growth and value investing each have unique risks and potential for rewards and may not be suitable for all investors. A growth investing strategy emphasizes capital appreciation and typically carries a higher risk of loss and potential reward than a value investing strategy; a value investing strategy emphasizes investments in companies believed to be undervalued.

CFA® is a registered trademark owned by the CFA Institute.

Heartland’s investing glossary provides definitions for several terms used on this page.

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