Author: admin

Vanguard Value (NYSEARCA:VTV) outperformed all the major indexes in 2022, declining only 2.07 percent. It was one of many value-oriented indexes and funds that beat the major indexes, thanks to avoiding the worst-performing sectors. Technology and technology-related companies such as Amazon, Meta, Netflix, Google and Tesla were anchors of growth sectors. Conversely, energy enjoyed a substantial double-digit gain. Utilities, consumer staples and healthcare, typically overweight in value funds, saw small gains or losses.

Aside from the aforementioned value sectors, Vanguard Value also has hefty positions in financial companies. Financial firms trade positively, with interest rates relative to the broader stock market because rising rates lift the earnings of financial assets. Valuations of stocks and bonds are negatively affected, but the income stream from bank loans rises. Insurance companies’ earnings rise as the interest paid on their large bond holdings increases.

Last year showed that random events can determine which sector leads the market. Russia’s invasion of Ukraine sent oil prices soaring in the first half of the year. Energy was far and away the best-performing sector as a result. If this year continues the trend of the last months of 2022, energy will struggle with a repeat performance. Many energy consumers adjusted to higher prices and Russia sanctions, the result being depressed energy prices. Crude oil and natural gas are flat over the past year, having given back all their 2022 gains.

Lower energy prices are great news for energy consumers, meaning virtually all of us. Lower inflation will lift pressure on financial asset valuations, particularly if interest rates stabilize. Lower energy costs will help energy-intensive industrial companies. Shipping costs are already tumbling internationally, but domestic supply-chain woes have kept diesel prices artificially inflated. If those can drop, consumer price inflation will slide even more than anticipated.

If we condense the past three years of market history into a paragraph, it was a story of a blow-off relative top in growth stocks followed by growth giving it all back. Tech stocks led during the pandemic, since they benefited from lockdown policies, including fiscal stimulus amid low inflation. As inflation picked up, the tailwind for growth started turning into a headwind. Value stocks started outperforming as growth stalled. Last year, growth gave back most or all of its gains, depending on the index. For example, since March 1, 2020, VTV has risen 46.78 percent. Vanguard Growth (VUG) has gained 26.57 percent over the same period. At the start of 2022, VTV was up about 50 percent from March 1, 2020, and VUG was up 85 percent. A similar shift happened with the Dow Jones Industrial Average and Nasdaq. The latter had a big lead in 2020 and 2021, but now the two indexes have sported similar returns since the onset of the pandemic.

The big question moving ahead is whether the bull market in growth resumes or whether the past year was the start of a major shift to value stocks. Given that inflation and interest rates are still elevated, along with strength in areas such as emerging markets that comport with value leadership, it looks like a shift in market leadership is underway.

Vanguard Value (VTV)
Vanguard Value tracks the CRSP US Large Cap Value Index. It has an expense ratio of only 0.04 percent and a 30-day SEC yield of 2.48 percent.

VTV has an average market capitalization of $108 billion, not far off the Large Value category average of $115 billion or the index average of $104 billion. It has substantially less in giant caps than the category though, at 37 percent versus 46 percent, while being in line with the index’s 38 percent. VTV’s large- and mid-cap exposure is also similar to that of the index.

Sector exposure is similar to the Large Value category, but VTV deviates in favor of value. Technology, communication services and consumer discretionary all are underweight. Healthcare, industrials, and consumer staples are overweight. Healthcare is the largest sector, with 22 percent of assets, followed by financials at 20 percent, industrials at 12 percent, consumer staples at 11 percent and energy at 8 percent.

The top 10 holdings in VTV as of November 30 were Berkshire Hathaway (BRK.B) at 3.10 percent of assets, UnitedHealth Group (UNH) 2.87 percent, Johnson & Johnson (JNJ) 2.62 percent, Exxon Mobil (XOM) 2.60 percent, JPMorgan (JPM) 2.27 percent, Procter & Gamble (PG) 2.00 percent, Chevron (CVX) 1.81 percent, Eli Lilly (LLY) 1.78 percent, AbbVie (ABBV) 1.60 percent and Pfizer (PFE) 1.58 percent.

VTV has a beta of 0.90 and a standard deviation of 20.50, compared with 0.94 and 21.75 for the category, making it slightly less volatile than the competition.

Performance
VTV has 1-, 3-, 5- and 10-year annualized returns of negative 2.23 percent and positive 8.66 percent, 8.37 percent, and 11.77 percent.

It has outperformed the category and index in every period.

Vanguard Mega Cap Value (MGV)
Vanguard Mega Cap Value has almost the exact same performance as VTV, with 1-, 3-, 5- and 10-year annualized performance of negative 1.82 percent and positive 8.71 percent, 8.69 percent and 11.87 percent.

MGV is slightly more expensive, with a 0.07 percent expense ratio, and this impacts the 30-day SEC yield, which is slightly lower, at 2.44 percent.

The top 10 holdings in MGV are identical to VTV, but with different weights. MGV’s top holding was UnitedHealth Group at 3.52 percent of assets, and the tenth holding, Pfizer, had 1.93 percent as of November 30. MGV is the more concentrated fund, with more assets in the largest companies. As a result, it has an average market capitalization of $158 billion.

MGV also has more assets in healthcare, at 25 percent of assets, almost 3 percentage points more than VTV, but the other sectors are similar. Performance shows this difference in healthcare hasn’t had a large impact on returns going back as far as 10 years. On the plus side, MGV has slightly lower volatility, thanks to its larger market capitalization. Investors aiming for low volatility may prefer MGV for this characteristic; otherwise, VTV has a slight edge on expenses.

Outlook
Value won 2022 because losses were concentrated in growth stocks. Value investors didn’t see large gains unless they placed hefty bets on the highly volatile energy sector. Otherwise, their outperformance was driven by what they didn’t own.

The factors that drove growth losses last year, such as inflation, higher interest rates and deglobalization, are positive for value stocks. Unless those factors reverse, value stocks will have an edge no matter whether the broader stock market rises or falls. If inflation and rates go higher than expected, losses will again be concentrated in technology, while a shift into a stronger economy will benefit earnings at industrial companies. One major industrial stock and DJIA component, Caterpillar (CAT), has already made a new all-time high in 2023. Conversely, Apple opened the year with a new 52-week low.

Broad value funds such as VTV can serve as core holdings within a diversified portfolio. Investors using value funds are most at risk of being overweight healthcare or financials if they hold separate sector funds in these areas. Unless an investor has all their portfolio in value funds, they probably aren’t very overweight energy or materials. Aggressive investors who want a little more risk probably have room for a small additional position in sector funds such as Vanguard Energy (VDE), but with a bearish outlook at the start of 2023, it may pay to wait some months before buying.

Interested in continuing to receive strategic guidance on Vanguard Funds? Subscribe to the Investor Guide to Vanguard Funds today to gain immediate access to our full archives, including our most recent issue.

Fidelity Equity Dividend Income (FEQTX) was one of many value-oriented funds that were outperformers in 2022. Diversified funds that had low technology exposure finished the year with small losses and even gains in many cases. Lack of exposure to mega-cap technology stocks along with avoiding speculative companies with little to no profits was half the battle. The other was having some positive exposure in the few sectors and subsectors that outperformed, such as energy and large-cap pharmaceuticals.

FEQTX’s current crop of top-10 holdings benefited most from the more than 80 percent rally in shares of Exxon Mobil (XOM). Higher oil prices and high inflation, plus low share prices coming out of the 2020 pandemic, helped power energy stocks last year. Consumer staples and healthcare were strong as well. Merck (MRK) was up 50 percent and Bristol-Myers (BMY) 20 percent. Johnson & Johnson (JNJ) had a small gain on the year, while Unilever (UL) saw only a small loss. These wins offset losses in holdings such as Cisco (CSCO) and Comcast (CMCSA).

Heading into 2023, the big debate is over economic growth. Inflation will fall because the first half of the year in 2022 contributed almost 5 percentage points of inflation. As long as inflation doesn’t suddenly reverse higher via geopolitical risk such as escalation in Ukraine, inflation should be far lower next year. Over the past six months (estimating December’s rate), the CPI increased 1.2 percent. If the trend carries into June, the CPI would fall to around 2.5 to 3.0 percent by then. This could dent holdings such as Exxon that rely on higher commodity prices, but the bulk of FEQTX’s portfolio is in dividend-paying blue-chip stocks. As inflation comes down, interest rates will stabilize or even decline.

The economy’s direction is more hotly debated. There are signs growth is slowing in areas such as manufacturing and housing, but overall economic growth remains solid. Surveys show employers report wage pressures and lack of skilled labor. Federal Reserve officials have singled out the surprisingly strong labor market as one reason why interest rates will remain higher for longer. Consumer spending has been robust. The yield curve is inverted, but it usually doesn’t steepen until the Federal Reserve starts cutting short-term interest rates. Finally, if we look at the stock market as a forward indicator, stocks such as Caterpillar (CAT) traded at new all-time highs in December. The market clearly thinks there will be rising demand for industrial products next year.

Funds such as FEQTX will do well in either of the most likely scenarios. A continuation of high inflation, higher interest rates and a strong economy will favor value stocks over growth. If all these trends reverse, investors will still favor dividend-paying stocks with strong financials over speculative growth stocks.

FEQTX is well positioned for variable outcomes because it has broad sector exposure. Financials is the largest sector at nearly 19 percent of assets but underweight relative to the benchmark Russell 3000 Value Index. Healthcare is next with 15 percent of assets. Blue-chip drug makers are a major subcomponent within the healthcare exposure. Along with Johnson & Johnson (JNJ), these stocks have earnings that are about as close to “recession proof” as companies get.

Technology is overweight at 13 percent of assets compared to the benchmark but still about half the exposure of the broader market. FEQTX also owns a different mix of technology stocks as represented by top holding Cisco. Energy is underweight at 6 percent of assets versus nearly 9 percent in the benchmark.

Overall, FEQTX leans toward the “growth” side of value with holdings such as pharma and tech stocks with high dividend yields. This makes it a good companion to more pure value funds that may overload the energy and materials sectors.

Management

John Sheehy has managed FEQTX since April 2017. He also manages Fidelity Stock Selector Large Cap Value (FSLVX).

FEQTX has an expense ratio of 0.58 percent. It has a turnover rate of 47 percent, down from 71 percent in the wake of the March 2020 market panic.

FEQTX paid a capital gain worth 5 percent of net asset value last year, 9 percent in 2021, 6 percent in 2019 and more than 11 percent in 2018. This fund should be held in a tax-advantaged account if minimizing taxes is part of your financial plan.

FEQTX earned a 3-star rating from Morningstar.

Portfolio

FEQTX has an average market capitalization of $54 billion, about half that of the Large Value category. It has fewer holdings in giant-caps and more in mid-caps. Compared to the average Large Value fund, FEQTX has about 14 percentage points less in giant-caps and 4 percentage points more in large-caps. Although only 5 percent of assets, the fund is also overweight small-caps relative to the category and index. Compared to the index, FEQTX has 20 percentage points lower exposure in giant- and large-cap holdings at 60 percent versus 80 percent for the index.

The top-10 holdings as of October 31, 2022 were Wells Fargo (WFC) 3.0 percent, Johnson & Johnson (JNJ) 2.9 percent, Unilever (UL) 2.9 percent, Exxon Mobil (XOM) 2.8 percent, Verizon (VZ) 2.4 percent, Sanofi (SNY) 2.2 percent, Bristol Myers Squibb (BMY) 2.2 percent, Cisco (CSCO) 2.1 percent, Merck (MRK) 2.1 percent and Comcast (CMCSA) 2.0 percent.

FEQTX is highly diversified, with its top-10 holdings accounting for only 24.6 percent of assets.

FEQTX has a beta and standard deviation slightly below that of the Large Value category.

Performance

As of December 27, FEQTX was down 0.91 percent in 2022. Over the past 1-, 3-, 5- and 10-year periods, it decreased an annualized 0.36 percent, then rose an annualized 6.95 percent, 6.99 percent and 10.30 percent, respectively.

FEQTX beat the Large Value category in all periods except the past 10 years, when it trailed by an annualized 0.10 percentage points. However, only about half of this period was managed by the current manager. Sheehy’s performance since taking over in 2017 has been excellent.

Outlook

Value funds outperformed greatly in 2022, and the conditions supporting their outperformance should continue. Fidelity Equity Dividend Income holds many “defensive” stocks that typically hold up better in bear markets. After a year in which some top holdings climbed more than 50 to 80 percent, another year of such strong performance is unlikely.

Economic and financial market conditions favor value stocks unless and until interest rates and inflation head back toward zero, something that won’t happen without further underperformance by growth stocks first. The best-case scenario for value stocks this year would be higher than expected inflation coupled with higher than forecast economic growth. Higher interest rates would trim growth stock valuations, while higher inflation and growth boost corporate earnings in the energy, materials and financial sectors.

Investors who want similar performance with a cheaper, more liquid fund can opt for Fidelity Stocks for Inflation (FCPI). The fund has a 0.29 percent expense ratio and 1.57 percent yield. FCPI outperformed FEQTX the past year as inflation took off because its portfolio is more fine- tuned for inflation. Since we expect inflation will drop at least in the first half of 2023, FCPI should have a smaller lead or even trail FEQTX in the first half of 2023. However, long-term investors who expect higher inflation in the coming decade may prefer building a position in FCPI for its inflation-oriented holdings.

Interested in continuing to receive strategic guidance on Fidelity Funds? Subscribe to the Investor Guide to Fidelity Funds today to gain immediate access to our full archives, including our most recent issue.