One of the longest-running conversations in the asset management industry continues to be the question of growth vs. value investing. Both sides have vehemently defended their approach through a sweeping range of economic cycles, ebbs and flows in the markets, and shifting dynamics.

Not so long ago, even in the past 20 years, this long-drawn-out debate seemed justified—in truth in the 10-15 years that followed the 2008 recession, growth investing truly drove the markets. As we entered one of the longest sustained bull runs in history—every investment felt like a growth investment when there was seemingly no end to how far the FAANGs* and other market leaders could go. But as growth started to slow in the face of the Covid-19 pandemic and the subsequent economic uncertainty that has followed, those on the value side might just feel their time is coming.

However, as tempting as it may be for managers to buy into the growth vs. value debate, there is a real case to be made for an approach that leverages elements of both, in full recognition of the ways that market dynamics have shifted in the past quarter of a century.

Growth Vs. Value: The History
At varying points in market history, both growth and value investing have enjoyed their time on top. In the build-up to the 2000 tech bubble bursting, growth names were enjoying an extended period of preeminence in the markets. Taking a longer-term view, value investing has typically outperformed growth over time, but over the past 10-15 years, the mouthwatering returns brought out from the leading growth names have stolen headlines and investor attention, all the while with value investors patiently waiting in the wings (Factset, January 2022).

As we’ve seen before, once these periods of growth to the extreme come to an end, what follows is typically a period of value investing outperformance, although past performance is not indicative of future results, as solid companies with excellent foundations and sensible valuations, draw new attention.

Growth Vs. Value: Today
Historically, the names that have comprised the growth and value indices have rarely had much in common. Of course, value names have become growth names, and vice versa, but largely speaking, growth and value, as the raging debate suggests, were two entirely different investment philosophies.

Today, that picture looks very different. What was once just a question of growth vs. value has become much more complicated, as growth-to-value or value-to-growth designation switches within the index providers become more frequent and more high-profile.

Meta (Facebook) and Salesforce—long-time growth stalwarts—for example, have more recently been added to the value indices. Indeed, growth vs. value is slowly shifting into growth and value, where the distinctions become harder and harder to make on a company-to-company basis.

Other notable names that, over the last two years, made a full or partial switch from growth to value within the Russell 1000 Indices include Eli Lilly, which shifted from 100% growth to partial value (21%), and S&P Global, which made a complete switch from 49% growth to 100% value. On the flip side, Proctor and Gamble went from 100% value to partial growth (43%), likewise Costco Wholesale went from 7% value to 100% growth and Home Depot went from 50% value to 100% growth (Factset, August 2022).

If ever there were a sign that the lines between growth and value were blurring, however, it’s that Google parent Alphabet now sits on both the Russell 1000 value and 1000 growth indices.

What’s also quite telling about the recent shifts across and between value and growth indices are the sector dynamics—mainly the blurring of lines and the growth of the technology sector within the Russell 1000 Value index, which was the sector that saw the largest increase in weight on the value index in June 2022.

Semiconductors, however, are an industry that both growth and value active managers currently favor, with many active managers feeling that the sector is in a period of secular growth. Furthermore, some names feature across many growth and value portfolios alike. Likewise, within the healthcare sector, pharma and biotech are terms often used interchangeably despite clear differences in the development of their therapies. Healthcare is the second fastest growing sector behind technology since 1986 yet trades at a near record discount to defensives (staples) and growth (tech) peers (Factset, May 2022).

Blurring Lines And What They Mean
In our view, the growth vs. value debate, and a staunch defense of either, in the current markets are more likely to result in missed opportunities than anything. If managers are still in the mindset that a name is either one or the other, they might need to take a deeper look, and the most prudent approach in the current environment is one that incorporates elements of both value and growth investing—an active management strategy that relies on fundamental analysis on a name-to-name basis.

The often-dramatic swings in the markets over the past several months, as recession fears loom and central banks globally ratchet up their efforts to combat historically high inflation, have driven many historically growth-oriented names into valuations that are becoming attractive to value investors. However, there will always be positive value stories in a growth market and vice versa.

In today’s markets, growth vs. value is looking much less like a debate, and more like a friendly conversation.

Don Klotter is managing director of New Capital, an EFG brand. Jeff Cullen is managing director of Schafer Cullen Capital Management, Sub-Advisor EFGAM-New Capital.