When the sky is blue, equity dispersion is usually pretty subdued and this is what we observed in December. Most equity styles performed in line with the global benchmark (MSCI ACWI, +3.6%), with the exception of Low Volatility (Low-Vol) stocks (+1.6%). Quality finished the strongest for the month (+4.1%) and the year (+35.1%).
In Canada, the BMO Canadian Low-Volatility Equity ETF (ticker: ZLB, -1.7%) struggled in December while the broad market BMO S&P/TSX Capped Composite Index ETF (ticker: ZCN, +0.4%) registered a small gain, bringing its year-to-date performance nearly equal (ZCN, +22.8 vs ZLB, +22.0%)1. We continue to prefer Low-Vol stocks in Canada, but further upside in oil prices, which would support the energy sector, would likely mean Low-Vol lags the broad market.
For Value, its significant underperformance versus global stocks (-6.7%) or Growth (-12.1%) in 2019 illustrates the challenges of potential value traps and how some structural drivers of returns may have changed. One potential reason is how intangible investments, which can be quite significant in tech companies, are typically expensed rather than capitalized, thereby not showing up in book value and misleading investors about the financial health of a company. The second, and perhaps most important reason for Value underperformance in recent years, is increasing industry concentration that has led to greater pricing power and higher profit margins that came along with higher growth for firms who captured market share. We recognize that the valuation spread (i.e. Value vs Growth) remains very wide and that this has historically been a good indicator for value outperformance. However, there are reasons to think many of these drivers have changed. We would argue for patience in calling for the great rotation.