Growth and Value

masonic

Audaxer 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.

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%. 

Yes, VLS60 will be tilted more towards value due to the UK bias. Overweighting the UK is currently a value play as the whole market has suffered due to sentiment in recent years.

Linton

masonic said:

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.

http://news.morningstar.com/pdfs/FactSheet_StyleBox_Final.pdf

masonic

Linton said:

masonic said:

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.

http://news.morningstar.com/pdfs/FactSheet_StyleBox_Final.pdf

Thanks, looks like a range of factors are taken into account. It seems the results are standardised such that about a third by market cap are binned into each category (value/blend/growth), so by definition a global index would come out in the middle as shown in the chart. As such, if every company currently categorised as value went bust tomorrow, the remainder of the index would still be classified as being balanced between growth and value, the boundaries moving to accommodate the new range.

Linton

masonic said:

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.

I have never really looked into CAPEs so may be wrong but but AIUI CAPE is based on 10 year average earnings.  If so it may be a very misleading statistic for the tech giants which have rapidly increased earnings in that period with share prices rising accordingly.

msallen

At my last annual rebalance in January I amended my model portfolio to switch out roughly 1/2 of my "global index core" (VWRL) and replace 1/4 of it with a "value tracker" (IWFS) and the other 1/4 with a handful of geographically focused smaller company active ITs. Whilst this was largely to reduce my exposure to the handful of FAANGs etc which dominate trackers such as VWRL and had grown so much recently, it also had the effect of increasing my value holdings and decreasing my growth ones.

masonic

Linton said:

masonic said:

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.

I have never really looked into CAPEs so may be wrong but but AIUI CAPE is based on 10 year average earnings.  If so it may be a very misleading statistic for the tech giants which have rapidly increased earnings in that period with share prices rising accordingly.

Agree, each measure has its flaws, but in this case (classifying growth companies) it is quite good for the very reason you indicate.

Prism

Linton said:

masonic said:

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.

I have never really looked into CAPEs so may be wrong but but AIUI CAPE is based on 10 year average earnings.  If so it may be a very misleading statistic for the tech giants which have rapidly increased earnings in that period with share prices rising accordingly.

It seems that Morningstar ignores historical earnings for their Style Box but uses forward looking projected earnings. I assume that is pretty short term (1 year) as companies don't tend to project much more than that. I think that CAPE is an interesting but flawed stat. It tells us if a country or index is expensive based on historical measures but nothing about whether that price is deserved nor what the future holds.

tebbins

aroominyork said:

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?

Should have made clear this is purely speculative market timing opinion.

Markets tend to follow "regimes" until a crisis point - .com, GFC, Brexit, Covid. The easiest example I can think of is on a trustnet chart, you can see easily how the FTSE 250s run of outperforming the FTSE 100 started in the .com bubble.

Another one would be the MSCI World Tobacco index's biggest drawdown being from late 1998-early 2000, yet since than tobacco has substantially outperformed, although that has reverted over the past 5 years.

It's unusual for regimes to last this long (~13 years), and for value or growth to outperform for this long.

Prism

I find it interesting that currently the best represented sector in the MCSI World value index is technology at 21%, followed by financials and consumer discretionary. So does that make technology into a value play

masonic

Prism said:

I find it interesting that currently the best represented sector in the MCSI World value index is technology at 21%, followed by financials and consumer discretionary. So does that make technology into a value play

Most likely it is telling us that there is polarisation within the sector. I doubt you will find any of the major tech players within that index, but their smaller competitors would be trading at relatively low valuations. Perhaps showing that the market believes the current leaders are believed to be secure in their dominant position and aren't predicted to give up market share to the competition. Understandable that a subset of tech would be unloved in that scenario. I imagine (though I haven't checked) that such tech companies would not be similarly represented among active value funds, though perhaps there are some up and coming tech companies eyed by those active fund managers.