Value to Trump Growth Over Next Five Years, Says Expert

What is unique about Equius' approach is that they are equally committed to a low-cost passively managed approach. So they are unlike classic value investors Oakmark or Longleaf Partners, who are active managers, and unlike Rick Ferri,who strictly relies on index products the components of which may not meet the strictest value criteria, says Nelson.

Equius' starting portfolio consists of large and small, U.S. and foreign, value funds.

The firm exclusively uses DFA products currently — not because they're wedded to DFA, but because they've still got the "best mousetrap," says Nelson, who is unimpressed with the ETFs he's seen to date, including the "pure value" Rydex series and PowerShares Rob Arnott-based RAFI indexes.

Equius is currently evaluating Bridgeway Funds' new Omni Tax-Managed Small-Cap Value (BOSVX) as a possible first non-DFA fund.

For the first time in a long time, Nelson foresees outperformance in both U.S. and foreign value stock categories. With some caution, he expects the most from Japanese small value stocks and is most pessimistic about emerging markets, with price-to-book ratios, he says, that are greater than developed market blue chips.

In other words, emerging market stocks are selling at a premium because of all the "uberoptimism" about their rapid growth rates, when they should be selling at a discount because of their inherently greater risks of political and market instability. (He cites the seven-week closure of the Egyptian market as just one example of the extra layer of risk found in developing nations).

But apart from the esteem in which emerging stocks are viewed by the market currently, Equius shuns them in principle, saying their financial characteristics are akin to those of growth stocks that underperform value stocks over the long term. "The market has already priced their growth into their share price," Nelson says. "We want to limit exposure to high-priced stocks across the board."

Equius' ideal ratio of U.S. to foreign stocks is 70% to 30%. Once you get past 40%, "currency hedging starts to overwhelm the diversification benefits of owning foreign stocks," Nelson says.

Nelson is not in awe of the prowess of famed active managers at Oakmark and Longleaf who buy and hold 30 to 50 stocks until they reach their intrinsic value. "They're just in the right part of the market," he says. "You can pretty much throw darts at those stocks."

So why don't more advisors follow this approach? Nelson cites what he calls "business risk." There are some periods — the late '90s or the past two years, for example — when value underperforms. "If you track the market more closely, it's easier to manage business relationships."

It's an advisor's duty, he says, not just to position a portfolio but to position clients' behavior to expect and accept these market cycles.