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.