In a generally mixed third quarter of 2023, value stocks provided a ray of sunlight for investors. That was especially true for those who were globally diversified.

Once high-flying growth stocks, which earlier in the year rode a wave of optimism about innovations in artificial intelligence and forecasts of an uptick in corporate IT spending, hit a wall in Q3. The quarter was marked by news of rising energy prices and heightened geopolitical concerns. In such an environment, value stocks actually gained ground in some key equity classes, particulary international developed and emerging markets. 

In the U.S., value-styled stocks — i.e., those with lower price-to-book ratios — held up better than growthier fare. After the quarter's end, researchers at Dimensional Fund Advisors crunched numbers for several of the most widely followed indexes in each market around the world. In terms of relative price, they found the average large-cap U.S. growth stock lost 4.5% in Q3. By comparison, a typical large-cap value stock slid by 0.7%. ¹

The performance gap was even greater in small caps: The average domestic small-cap growth stock returned -6.1%. At the same time, the typical U.S. small-cap value stock slid by 2%. In other parts of the world, DFA's estimates — again, based on broad commercial benchmarks — found much the same in Q3. Those included:

• In developed international markets, large-cap growth stocks on average lost 7.6% as large-cap value equities sank by 0.1%. Also in the quarter, the average small-cap growth stock fell by 6.4% while its small-cap value rival slid 0.9%.
• Among emerging markets stocks, large-value held up much better (-0.4% vs. -4.2%). Interestingly, while small- and large-cap equities in developed international markets — across both growth and value styles — finished Q3 with similar losses on average, in developing markets small held up substantially better than large (-0.3% vs. -2.3%). As a result, the average emerging markets small-cap growth (-0.1%) slid roughly in-line with small-cap value (-0.6%) in the quarter. 

Facing such an abrupt swing in global market sentiment, stock jockeys faced increasingly difficult times attempting to read the tea leaves. At the end of Q2, many active stock fund managers predicted that growth's recent spate of outperformance signaled a new era dawning for investors. Warnings of the value premium disappearing forever spread across major media outlets, ranging from the Wall Street Journal and Financial Times to Barron's magazine and cable television network CNBC. 

What a difference three months can make, though. During Q3, the benefit of investing in a globally diversified portfolio of index funds tilted to value stocks reasserted itself across domestic, international developed and emerging equity markets. While such a reversal might've whipsawed traders' portfolios, it probably didn't surprise long-standing IFA investors. 

Since our founding in 1999, we've been selecting index funds equipped to take advantage of key investment factors that leading academic researchers have identified as drivers of higher expected returns. In terms of equities, those include measures relating to value, size and profitability. The chart below shows how powerful these factors have proved over time to building wealth.

Domestic Equities

Domestic stocks lost ground in the third quarter as all six of IFA's domestic equity indexes posted negative returns. Not all types of assets, however, fell at the same pace. Indexes with significant exposure to growth stocks were hit harder than those focused on value-styled stocks. Small growth, which historically has been a long-term laggard, suffered the most damage. By contrast, domestic small value and large value held up much better in Q3. Also worth noting: Through September, all major IFA U.S. stock indexes remained positive for the year.

International Equities

International value stocks in developed markets produced positive returns in Q3. The quarter's leader among major indexes was the IFA International Small Cap Value Index, which returned 1.89%. The IFA large-cap focused value index tracking international equities also gained ground in the third quarter. At the same time, the blended International Small Company Index fell by more than 2%. Notice, too, that each of these IFA value stock indexes ended September with significantly greater returns on the year than the cousin blended equities small-cap index.

Emerging Markets Equities

Stocks issued by companies based in developing countries showed mixed results in Q3. In particular, IFA indexes with exposure to growth both turned in negative performances in the quarter. That was true across small- and large-cap stocks, although the IFA Emerging Markets Index — which is focused on large caps — slid much worse. Meanwhile, the IFA Emerging Markets Value Index gained 0.12% in the quarter. All three key emerging markets indexes ended September on solidly positive ground for the year.

Real Estate Equities

Domestic REITs produced negative returns that approached double-digit percentage losses in Q3. International real estate investment trusts in developed international markets also fell in the quarter, although by a slimmer margin. Real estate stocks in emerging markets managed to finish the quarter with a slight gain, according to estimates by Dimensional Fund Advisors. Since U.S. stocks represent a majority of the world's market capitalization in real estate, the IFA Global REIT Index slid by more than 7% in Q3. For the year, the global index remained in negative territory through September.

Fixed-Income

In the third quarter, the 30-year U.S. Treasury rate increased by 0.86% to 4.73%. At the same time, the 10-year U.S. Treasury rate rose by 0.73% to 4.59%. Also, the five-year U.S. Treasury rate rose by 0.41% to 4.60%. If interest rates have increased, the price of existing bonds can generally be expected to decrease, and vice versa. 

For Q3, IFA's fixed-income benchmarks produced strong returns. Three of the indexes generated 1.30% or better results. The IFA Short Term Government Index finished a tad lower a return of 1.29%. All four IFA bond indexes managed to build on the previous quarter's positive returns. For the year, each had gained 3.50% or more through September.

IFA Index Portfolios

The third quarter showed how different exposures to risk impacted short-term portfolio outcomes. That's why we like to encourage investors — whether relative newbies or well-educated veterans — to engage in an ongoing conversation with an IFA wealth advisor regarding each person's risk capacity. Besides offering an online Risk Capacity Survey, we provide to each client a complimentary and holistic financial plan. 

Below is an overview of how several IFA Index Portfolios performed in Q3 as well as over three-quarters of 2023. All of these returns are shown net of the maximum annual 0.90% advisory fee through Sept. 30, 2023.

Each quarter, we monitor our recommended funds for clients. As part of that process, we've developed a rating system. For a summary of those results, please feel free to check IFA's Performance Monitoring Report (PMR). 

The wealth of IFA's educational materials are available for Apple iOS and Android devices via the IFA App. This free App is available to download from both the Apple App Store and the Google Play Store for Android.

Footnote:

1.) Dimensional Fund Advisors, "Quarterly Stories 3rd Quarter 2023," October 2023.

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Performance results for actual clients that invested in accordance with the IFA Index Portfolio Models will vary from the backtested performance due to the use of funds for implementation that differ from those in the index data, market conditions, investments cash flows, mutual fund allocations, changing index allocations over time, frequency and precision of rebalancing, not following IFA's advice, retention of previously held securities, tax loss harvesting and glide path strategies, cash balances, lower advisory fees, varying custodian fees, and/or the timing of fee deductions.

This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful.  Investing involves risks, including possible loss of principal. Performance may contain both live and back-tested data. Data is provided for illustrative purposes only, it does not represent actual performance of any client portfolio or account and it should not be interpreted as an indication of such performance. IFA Index Portfolios are recommended based on time horizon and risk tolerance. Take the IFA Risk Capacity Survey (www.ifa.com/survey) to determine which portfolio captures the right mix of stock and bond funds best suited to you. For more information about Index Fund Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/ or visit www.ifa.com.