Signal From Static: Valuing Growth or Growing Value?

Signal From Static: Valuing Growth or Growing Value?

October 24, 2022

The growth vs. value debate is in the news again. A well-known hedge fund manager has claimed that true value investing is dead, slain by the ETF juggernaut and those who have switched to computer-driven algorithms to choose stocks, labels be damned.

This comes at a time when “value” strategies have been outperforming “growth” strategies. Traditional value stocks like oil producers and utilities have taken the lead from their growthy tech and consumer-discretionary cousins. And Wall Street pundits are now claiming that value is poised to outperform into the future, while growth remains moribund.

If only it were that simple.

While the labels are an easy out, the trouble is that there are many definitions of what constitutes a growth or value stock.

A simple definition of a growth company is one where profits are growing faster than the markets’ overall. Of course, this ignores the fact that, for instance, biotechnology companies often show no earnings for years as they burn cash to discover the next great therapy. Amazon, one of the best-performing growth companies of all time, had zero profits to show for its growth for years. Still, I don’t think anyone would consider either Amazon or the typical biotech to be value companies, which typically see their shares selling for lower valuations relative to their earnings or book value, and which often pay a dividend.

Here’s where it gets tricky, though. Apple is certainly a growth company, but it pays a dividend. Many of the largest U.S. banks were, and still are, considered value companies, yet for years they paid no dividends at all.

Over the almost 45 years that the Frank Russell Company has calculated returns for large growth (Russell 1000 Growth index) and value (Russell 1000 Value index) stocks,­ neither one has outperformed the other.

Chart shows changes in relative value between hypothetical investments in the Russell 1000 Growth and Russell 1000 Value indexes on a monthly basis from December 1978 to September 2022. Every 0.1 change represents a 10% change in relative value. The line rises when the growth index is outperforming; a falling line indicates the value index is outperforming.
Note: Chart shows changes in relative value between hypothetical investments in the Russell 1000 Growth and Russell 1000 Value indexes on a monthly basis from December 1978 to September 2022. Every 0.1 change represents a 10% change in relative value. The line rises when the growth index is outperforming; a falling line indicates the value index is outperforming. Sources: Morningstar, Adviser.

Value stocks and growth stocks have traded leadership and, as the chart so clearly shows, the points when style preferences turn can be swift. Attempts to time the changes are fraught.

Yes, there’ve been periods when growth beat value—such as the 26 months from December 1997 through February 2000 (up 31.8% annualized vs. 4.2% for value). Equally, there have been periods when value outran growth. Yet, at the end of the day, after more than four decades, growth stocks and value stocks have come out at the same place.

Sources: Morningstar, Adviser.

So, at Adviser we don’t try to trade styles. Diversification has always been a bedrock principle of our investment approach. We try to maintain a balance between value and growth stocks—particularly in our index-based strategies. This ensures we participate no matter which style is leading the performance derby.

When assessing the state of the markets and the state of your portfolio, I believe it’s important to ignore—or, at a minimum, be highly skeptical of—attempts to use simple labels to describe more complex investment strategies.

Instead, continue to focus on core investment principles including diversification, time in the markets and controlling risk in the furtherance of meeting your objectives and long-term goals. Don’t let the noise of the growth-vs.-value debate distract from the signals of smart portfolio management.


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