CHICAGO BALTIMORE PHILADELPHIA ST. LOUIS

Investment Symposium 2018

Historically, investors have been rewarded for buying stocks that are cheaper as characterized by a low price-to-book or low price-to-cash flow relative to peers. This is known as value investing. Below, we show the annualized 10-year returns from value investing as represented by the Fama/French value factor since the Great Depression. For the most part, there has been a healthy, consistent, and positive value premium.

Notably, value’s underperformance has been pretty rare as highlighted by the first gray circle in 1999. Although value’s premium was negative for an instant in 1942, value’s most famous period of underperformance was during the rise of the Tech Bubble in the late 1990s. During this time, value had a drawdown of 41%. Many investors thought value stocks like Proctor & Gamble, Verizon, and Honeywell International could never compete with high flying growth stocks like Microsoft, Cisco Systems, and Intel.

Unfortunately, sentiment changed in March 2000 when many growth stocks that had secured high valuations reported negative earnings. The Tech Bubble burst in March 2000 and did not end until October 2002. During this time, the value premium surged and value outperformed growth by 55% until the top of the equity market in October 2007.

The Impact of Technological Innovation on the U.S. Equity Market and the Value–Growth ContinuumSAMANTHA T. GRANT, CFA, CAIA, SENIOR RESEARCH ANALYST, U.S. EQUITIES

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U.S. Value Non-U.S. ValueSource: Kenneth French Data Library, eVestment; December 31, 1926 – July 31, 2018. U.S. Value represented by Fama/French HML. Non-U.S. Value represented by MSCI EAFE Value-MSCI EAFE Growth

Value outperforms growth... until recently

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Value Outperformance

Value Underperformance

CHICAGO BALTIMORE PHILADELPHIA ST. LOUIS

Today, value is underperforming growth and the value premium is negative once again. What makes the current period unique is the duration of value’s underperformance. Growth outperformance is again fueled by excitement over Technology-related FANG stocks and its many derivations — Facebook, Apple, Amazon, Netflix, Microsoft, and Alphabet (Google). While these stocks offer strong revenues and earnings growth, they also feature higher valuations and are seemingly priced to grow forever. For example, Amazon and Netflix trade at over 100x price to earnings while the S&P 500 trades at 21x price to earnings as of the end of September 2018.

Ultimately, it is difficult to forecast perpetual growth rates like we have recently seen from the FANG stocks, and what you pay for a stock today does and will matter in the future. The potential decline in technology-related growth stocks could be painful and swift. As a result, we advise investors not to chase relative growth outperformance and instead adhere to their strategic, long-term asset allocations.

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The sources of information used in this report are believed to be reliable. Marquette Associates, Inc. has not independently

verified all of the information and its accuracy cannot be guaranteed. Opinions, estimates, projections and comments on

financial market trends constitute our judgment and are subject to change without notice. This material is not financial advice

nor an offer to purchase or sell any product. References to specific securities are for illustrative purposes only and do not

constitute recommendations. Past performance does not guarantee future results.

About Marquette Associates

Marquette Associates is an independent investment consulting firm that guides institutional investment programs with a

focused client service approach and careful research. Marquette has served a single mission since 1986 – enable institutions

to become more effective investment stewards. Marquette is a completely independent and 100% employee-owned

consultancy founded with the sole purpose of advising institutions.

For more information, please visit www.marquetteassociates.com.