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How to Pick a Large-Value Fund

Have your portfolio ready when investor sentiment swings to the value side of the style box.

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As you make your investing plans for 2021 and beyond, bolstering the value side of your portfolio is worth considering. Value stocks appear to be one of the few underpriced areas of the U.S. equity market, as Morningstar's Dave Sekera and Amy Arnott have recently noted in separate articles. The extreme value-growth spread has been a noted feature of the market for a number of years, for reasons not fully understood, but believers in mean-reversion would expect that pattern to shift at some point, perhaps in an extreme fashion. GMO's Ben Inker, for instance, argued in a recent letter to investors that "no matter where you look, no matter how you slice it, value looks cheap," while DFA's Gerard O'Reilly made a similar case for value on a recent episode of Morningstar's The Long View podcast.

Moreover, there is now some momentum on the side of value proponents. In the fourth quarter of 2020, the Russell 1000 Value Index outperformed its large-growth counterpart, 16.3% to 11.4%. And finally, if you have simply let your portfolio ride the markets in recent years, that would likely lead to an overweight on the growth side of your portfolio, so even if only for rebalancing purposes, it may make sense to reinvest in value funds. I am no proponent of market-timing, but there are plenty of fundamentally based reasons to be thinking about value strategies.

Josh Charlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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