The first half of 2025 has delivered one of the most dramatic reversals in recent market history. Yet it's a story largely overlooked amid the noise surrounding tariff turmoil and the stumbling Magnificent Seven. While headlines obsess over US market volatility and mega-cap technology stumbles, international value investing has quietly staged an impressive comeback.
The Dimensional Fund Advisors' International Value fund (DFIVX) has returned 17.97% year-to-date through May, Versus a modest -0.17% for the S&P 500 - an astonishing 18.14% outperformance. Yet this remarkable performance has attracted a fraction of the attention devoted to Tesla's travails or Apple's China Concerns.
The neglect is striking. Larry Swedroe's analysis reveals international value has quietly outperformed the S&P 500 over the past five years too, delivering 18.47% annualised returns versus 16.33% for US large caps. (1) While commentators obsessed over the biggest US tech stocks, international value was steadily validating patient, diversified investors.
Bu The Numbers tell the story
To appreciate the international values' comeback, remember it spent the better part of a decade in the shadows. From 2010 through 2020, international value funds frequently lagged both growth counterparts and US markets, triggering substantial outflows and widespread questioning of the strategy's relevance.
The regional breakdown contrasts sharply with US-centric financial media narratives. European value stocks have led the charge, benefiting from aggressive fiscal stimulus and attractive valuations versus US peers. Japanese value equities have similarly outperformed, supported by corporate governance improvements, developments that received minimal coverage compared to Tesla's latest earnings miss.
JPMorgan's Q2 2025 factor analysis noted this represented "one of the strongest factor performance periods in recent memory", with value's outperformance spanning multiple regions and market segments. (2)
What drove the shift
Several forces converged to create conditions for international values comeback. Ironically, many were the same forces dominating headlines for their US market impact. The primary catalyst was the weakness of the dollar, caused by uncertainty over US trade policy and geopolitical tensions.
While commentators focused on tariff concerns affecting individual US companies, broader currency implications provided a powerful tailwind for international markets. European markets benefited from Germany's €1 trillion fiscal stimulus package and the EU's fiscal rule relaxation. All of these developments received far less coverage than speculation about President Trump’s trade policy.
Most importantly, extreme valuation spreads between growth and value stocks finally began normalising. Research from Dimensional showed value spreads had reached dot-com era levels, creating conditions historically associated with strong subsequent value performance. (3)
The macro regime shift from the low-rate, growth-dominated 2010s to today's higher-inflation, higher-rate environment has also proved supportive, penalising expensive growth stocks while creating opportunities in undervalued international markets.
The longer vindication
While 2025's performance grabbed some attention, longer-term evidence for international value's effectiveness had been accumulating quietly. From October 1996 to May 2025, Dimensional's international factor funds delivered compelling evidence: DISVX achieved 7.95% annualised returns, DFISX delivered 7.02%, and DFIVX returned 6.66% - all comfortably ahead of the 5.45% MSCI EAFE Index.
This outperformance persisted even during the challenging post-Global Financial Crisis period when US factors struggled. Academic research consistently supported these results, with Blitz et al. finding long factor positions delivered Sharpe ratios up to 1.10 with statistically significant positive alphas. (4)
The "death of value" narrative was always problematically US-centric, shaped by mega-cap technology dominance in financial media. While American value strategies struggled against Apple, Google, and Amazon, international markets told a different story that received minimal attention. AQR's market-neutral factor fund (QSPRX) has returned approximately 6.5% annually since 2015, providing unambiguous evidence that factor premiums persisted beyond the Magnificent Seven narrative.
As Swedroe notes, critics overlooked that value's US underperformance stemmed not from disappointing earnings but from dramatic valuation spread widening, a phenomenon that historically proves unsustainable regardless of Tesla's quarterly headlines. (5)
Lessons for Practitioners
The 2025 reversal offers crucial lessons, particularly about headline-driven narratives overshadowing systematic investment principles. While clients worried about tariff impacts and Magnificent Seven valuations, real opportunities were developing in overlooked international value markets.
Global diversification within factor strategies proves critical. Practitioners who concentrated factor exposure in US markets, swayed by constant media attention on American stocks, missed substantial opportunities where factor premiums remained robust but received minimal coverage.
The experience validates managing clients through full-factor cycles rather than abandoning strategies during quiet periods. Advisers and fund managers who maintained international value allocations despite years of relative underperformance have been dramatically vindicated.
For client communication, 2025 provides a powerful case study in looking beyond headline narratives. While clients naturally focused on daily US market drama, successful practitioners emphasised theoretical foundations and long-term evidence, preparing clients for both inevitable quiet periods and potential dramatic reversals.
Once again, the experience highlights the value of staying broadly diversified and focusing on the long term. Precisely when attention focused on US market volatility and tech concerns, the greatest opportunities emerged in more overlooked corners of the global markets.
references
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References:
- 1. https://larryswedroe.substack.com/p/the-little-noticed-outperformance
- 2. https://am.jpmorgan.com/us/en/asset-management/adv/insights/portfolio-insights/asset-class-views/factor/
- 3. https://my.dimensional.com/encouraging-data-from-values-past-and-present
- 4. https://www.cfainstitute.org/en/research/financial-analysts-journal/2019/when-equity-factors-drop-their-shorts
- 5. https://larryswedroe.substack.com/p/the-reports-of-factor-investings