Growth and Value

aroominyork

Many threads have commented on how growth has outperformed value during the last decade, and this Pensioncraft video shows how that patterns goes against historic trends. It seems to me that for the move to growth to be sustainable, there would need to be a sustainable pattern of a smallish number of companies growing exponentially, leaving in their wake the rest of the corporate world. This might explain why the 'rump' will not catch up and why their supposed value pricing actually reflects their future prospects. The only other dynamic, it seems to me, is that this has been a tech-driven (mostly) era of high growth valuations, and there must be a tipping point or tipping points when value will come back strongly into favour.

The vast majority of active funds are growth-oriented, which makes it easy to fall into a trap (if it is a trap) of being overweight to growth. I have been DIY investing for four years and have gradually moved my active funds those which are not too far on the growth side (I use Morningstar’s style boxes as my main source of reference). I have also increased my index fund allocation which is where I get most of my blend/value exposure.

How do others among you approach this?

ColdIron

I approach it by ignoring it. 'Value' stocks often disappoint

aroominyork

ColdIron said:

I approach it by ignoring it. 'Value' stocks often disappoint

But does a well run value fund disappoint in the same way? Do you contest the view/data that value has outperformed over the long run?

tebbins

It's worth saying firstly that the difference has been significant but not huge and most of it happened since Covid (https://www.msci.com/www/fact-sheet/msci-world-growth-index/08653991, https://www.msci.com/www/index-factsheets/msci-world-value-index/06457479).

Most stocks often disappoint anyway, stock market returns are driven by the minority of companies who become the future.

There's also a difference between growth and quality. Though the two have overlapped recently, growth does not imply higher quality anymore than value implies worse quality. The value approach is buying because the price is below what you think the fundamentals indicate a fair price to be, the growth approach is simply that you expect higher than average growth and believe the current price is not unreasonable to pay for that.

Post-GFC has been pretty poor for value so far, I think (pure guesswork, entirely speculative, market timing and all that) by the end of this decade, a growth/value comparison chart will probably show the Covid recovery as the time value started to take over. Neither factor can outperform indefinitely and neither factor has, although since year end 1974, around the bottom of the mid 70s crash, value is still in the lead.

Audaxer

As we don't really know whether growth or value will be best in the coming decades, maybe that is a good argument for global passive index funds where you get a fairly even percentage split between growth and value.

aroominyork

tebbins said:

 I think (market timing and all that) by the end of this decade, a growth/value comparison chart will probably show the Covid recovery as the time value started to take over.

Would you like to expand on your rationale for this?

masonic

Audaxer said:

As we don't really know whether growth or value will be best in the coming decades, maybe that is a good argument for global passive index funds where you get a fairly even percentage split between growth and value.

Is that actually true? Wouldn't it be the case that value companies (which are by definition undervalued) are underweight in a market-cap weighted index, given the market-cap is a function of valuation? Index investing tends to allocate more of your money into momentum/growth companies. I've tended to redress that balance by favouring value funds in the active part of my portfolio.

Linton

20 years ago Value was in fashion.  "Tortoise vs hare" was often quoted.  Value being a worthwhile investment was demonstrated by the tech boom/crash which Value stocks largely avoided (see Woodford at the time when he kept to his strategy).  At the moment we have a market heavily dependent on large maturing Growth stocks.  This surely cannot continue indefinitely.

So if you are relying on your portfolio for your long term well-being an appropriate balance between Value and Growth is required.  Going solely for growth is just climbing up the risk/reward ladder.

Hiowever there are fewer opportunities to invest in Value than Growth at the moment.  For example,look at any well performing Small Companies fund, it is probably highly Growth oriented.

My approach is to use Value to meet specific objectives rather than just regard it as a counterweight to Growth.  One is income as dividends are largely provided by Value companies, and the other is Wealth Preservation since Value companies can be expected to be more stable than Growth.  Then the balance between the Growth, Income and WP portfolios automatically gives an appropriate weighting to Value overall.  For example, accordng to Morningstar  my Growth portfolio is 15% value, 40% Blend, 41% Growth and 4% unclassified whereas overall equity is split 21% Value, 39% Blend, 34% Growth and 6% unclassified.

aroominyork

masonic said:

Audaxer said:

As we don't really know whether growth or value will be best in the coming decades, maybe that is a good argument for global passive index funds where you get a fairly even percentage split between growth and value.

Is that actually true? Wouldn't it be the case that value companies (which are by definition undervalued) are underweight in a market-cap weighted index, given the market-cap is a function of valuation? Index investing tends to allocate more of your money into momentum/growth companies. I've tended to redress that balance by favouring value funds in the active part of my portfolio.

HSBC FTSE All-World Index. Only very marginally slanted towards growth.

masonic

aroominyork said:

masonic said:

Audaxer said:

As we don't really know whether growth or value will be best in the coming decades, maybe that is a good argument for global passive index funds where you get a fairly even percentage split between growth and value.

Is that actually true? Wouldn't it be the case that value companies (which are by definition undervalued) are underweight in a market-cap weighted index, given the market-cap is a function of valuation? Index investing tends to allocate more of your money into momentum/growth companies. I've tended to redress that balance by favouring value funds in the active part of my portfolio.

HSBC FTSE All-World Index. Only very marginally slanted towards growth.

Interesting, how is that being calculated? Presumably not based on CAPE, as the current all-world CAPE is 26.6 vs the median of ~19, which means that the index is dominated with companies that are trading on an above average earnings multiple and therefore probably shouldn't be defined as value stocks. I would suggest the definition of value and growth has been shifted to accommodate the current dominance of growth in the above analysis.

Audaxer

masonic said:

Audaxer said:

As we don't really know whether growth or value will be best in the coming decades, maybe that is a good argument for global passive index funds where you get a fairly even percentage split between growth and value.

Is that actually true? Wouldn't it be the case that value companies (which are by definition undervalued) are underweight in a market-cap weighted index, given the market-cap is a function of valuation? Index investing tends to allocate more of your money into momentum/growth companies. I've tended to redress that balance by favouring value funds in the active part of my portfolio.

I have some L&G International Index fun, which has 26% Value, 37% Growth, 37% Blend, so yes, it has a bit more Growth than I expected. I recently invested in this fund and a growth IT to replace a few of my UK equity funds because I was overweight in value overall.

I also hold VLS60, and the equity part of that fund is more evenly split with Value 28%, Growth 30%, Blend 42%.