Which wins – value or growth?
Over the last four years, the returns of these styles have been close, although growth has tended to win. Still, managers are generally reluctant to say that one style will dramatically triumph over the other, as happened in 2009.
“It’s a close call. I’d have to say that growth's and value’s performance have been very close for the last few years,” says Joseph Zidle, portfolio strategist for Eaton Vance. He says in his view, it has been virtually a half growth/half value market over the last five years. Where will the premium be over the next few years? “It’s tough to call,” he adds.
Given the similar performance of both styles from 2010 on, the style debate has intensified so that many fund pros prefer neutrality.
The Switzerland-like approach to the debate is logical. Growth has tended to beat value when markets are booming -- as it did in the last four years of the 20th century and the year after the market meltdown of 2008. But value wins when the market is being hammered -- in the last four negative years going back to 2000, value has won, or at least lost less. (For example, in 2002, growth lost 27.9 percent while value only lost 15.5 percent, according to Russell numbers.
Deciding on what style to choose has been a difficult call for advisors over decades. That’s because, over the long term, value and growth have each had shining moments. Over the very long term, say 35 years, value wins. However, over short periods, say the last four years, growth wins, but not glaringly so.
One must go back to 2009 to find a big difference between the two styles on a year-to-year basis. That’s when growth almost doubled value’s return (37.2 percent against 19.7 percent, according to Russell 1000 numbers), although both styles were hammered in the disastrous market meltdown of 2008. However, the value investor tends to muddle though bad times with fewer wounds than the growth investor, who lags in down periods.
But the last few years have been great for growth. It has now been just about five years since the stock market hit bottom in the wake of the 2008-09 financial crisis. Since then, stocks have done very well, despite quite a few bumps along the way. As of Feb. 21, the S&P 500 index has an annualized five-year return of 21.6 percent, including a 32.4 percent gain in 2013, and small- and mid-cap stocks have performed even better.
So growth is in the lead for now. For instance, in 2013 the Russell 100 Growth index returned an average of 33.5 percent while the Russell 1000 Value index gained 32.5 percent. But in 2012, value won but by just some 2 percent (17.5 percent versus 15.3 percent). Still, in the two years before, growth was in the winner’s circle, but only by some 2 percent.
Indeed, if one wants to measure the two styles since the end of 2008, growth beats value by some 400 basis points (21.1 percent to 17.1 percent), says David Koenig, an investment strategist for Russell Indexes. But growth won with a higher standard deviation.
A Morningstar analyst agrees. Daniel Kathman says “aggressive” growth strategies have benefited the most in the market run-up. “The best performers over the past five years have tended to be those with relatively aggressive growth strategies,” he says.
But several managers said they are hedging between growth and value. “Our process, which is based on picking stocks and active management, leads us to be slightly tilted toward the growth side,” says Michael Morris, portfolio manager for Delaware Investments. Morris says based on his macro-economic assumptions (interest rates will remain relatively low on a historic basis and a recovery still has years to go), it will generally mean his bias is “slightly in favor of growth.”
Russell’s Koenig says advisors deciding between growth and value must consider how ready a client is to invest and how far back to look to evaluate the two styles. He suggests that the long-term view, which is one investors don’t often take, is the best way to view the growth vs. value choice.
Koenig calls the last five years “generally a growth market, but there have been some hiccups along the way.” And over the very long term, value makes sense. Value even wins and takes fewer chances, according to Russell numbers.
“You do see a value premium; where value has outperformed growth over the very long term; but there are certainly periods when growth significantly outperforms value as well,” Koenig says.
For example, if you want to go back to the end of the 1970s, value has slightly beaten growth (13.5 percent to 12.9 percent and with about 25 percent less in standard deviation. “Historically, growth has had a higher standard deviation and a higher beta relative to value,” Koenig notes.
However, just before the 2008 market meltdown, he notes, value, for a short period, was riskier than growth. Why did value have a higher beta? Koenig says it was an unusual circumstance, owing to value’s higher exposure to the financial indexes.
Could we get an overvalued market in the short term that causes a repeat of 2008, when both value and growth were socked?
“If you look at the large-cap space, the [price-earnings] multiples are in the mid teens. And that, by historical standards are not onerous, especially when you look at how low interest rates are,” Morris says.
But central bank actions could cause the picture to change, he adds. “The pace of tapering will be key,” Morris says. “Anytime you try to unwind what has been a billion dollars of annual support for the economy, that lead to a spike in rates. That could be a risk.”
Koenig adds tapering makes growth investing more vulnerable. However, a soft landing could mean a repeat of 2009, when some value investors felt they had missed the best of a bull market.
Choose growth or value? Long term vs. short term, what’s best for the client?
It is difficult to say, say market pros, because no one knows if we are in the middle of a bull market or the beginning of a bear market. However, for the time being, the former seems more likely.
Flip a coin and call it.
Maybe the best answer is to put the coin back in your pocket and use some form of both styles.
Which Wins - Value Or Growth Investing?
March 25, 2014
Which wins – value or growth?