Home Guides & Resources chevron_right Economy and the Markets Signal From Static: Valuing Growth or Growing Value? Published October 24, 2022 Daniel P WienerChairman 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 ETFA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. juggernaut and those who have switched to computer-driven algorithms to choose stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company., labels be damned. This comes at a time when “value” strategies have been outperforming “growth” strategies. Traditional value stocksA stock that is statistically cheap as a multiple of its earnings or book value, as compared to the overall stock market. 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 stockA stock that is statistically cheap as a multiple of its earnings or book value, as compared to the overall stock market.. 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 valueAn accountant’s estimate of the value of the assets of the company, minus its liabilities. This differs from a company’s market value, which is the prevailing market rate that investors will pay to own the company., and which often pay a dividendA cash payment to investors who own stock in the company.. 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 dividendsA cash payment to investors who own stock in the company. 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. 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 stocksA stock that is statistically cheap as a multiple of its earnings or book value, as compared to the overall stock market. and growth stocksA stock whose issuing company is expected to grow at a significantly higher rate than the market. 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. DiversificationA strategy for managing investment risk by investing in a mixture of different investments. Since different asset classes face different risks, even if one type of asset declines in value, others may not. 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 diversificationA strategy for managing investment risk by investing in a mixture of different investments. Since different asset classes face different risks, even if one type of asset declines in value, others may not., time in the markets and controlling riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. 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. This material is distributed for informational purposes only. The ideas and opinions contained herein should not be viewed as recommendations or personal investment advice. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed. Our statements and opinions are subject to change without notice. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged. Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs. For a summary of Adviser Investments’ advisory services and fiduciary responsibilities to our clients, please review our Form CRS here. © 2022 Adviser Investments, LLC. All Rights Reserved. Tags: Dan WienerGrowth stocks.growth vs. valuevalue stocks