28 February 2023 – The oldest debate in investing is centred on Value vs Growth investment styles. It’s not as intense as the State of Origin, but it can be heated.
‘Value stocks’ refers to companies that are sensitive to the economic cycle, most notably the banking and resource sectors; while “Growth stocks’ are companies with earnings that amplify faster than the general rate of economic growth. The sectors most synonymous with Growth are technology and small cap stocks.
The grandfather of Value investing was Benjamin Graham, but the most recognisable Value investor today is Warren Buffet, who needs no introduction. Growth investing was popularised by Thomas Rowe Price, Jr., with one of the most recognised US Growth investors today being Cathie Wood of Ark Invest.
There are only two hard facts of style-based investing – no single style outperforms consistently, and timing them is extremely challenging. Figure 1 below shows the MSCI World style indices for Growth and Value, as well as the ratio of the two. The first thing that stands out is that Growth is more volatile than Value i.e. the red line jumps around more than the orange line. The second observation is that the relative performance of each style can be abrupt or a slow grind in either direction. In the aftermath of the DotCom bubble, Value stocks outperformed, reaching new highs. After the GFC the tide reversed and Growth stocks consistently outperformed, accelerating into Covid19, with technology companies benefiting aggressively from lockdowns and the WFH phenomenon.
From their low point in 2020, Value has outperformed Growth – by nearly 40% over the past 12 months – but on a historical basis it still remains ‘cheap’ on both an outright and post-crisis basis (assuming the magnitude of the 2000-06 bounce is a guide).
Here at Human Financial we prefer not to lash ourselves to any masts; instead, we layer in styles when they are being rewarded and remove them when they are not. This approach allows us to deliver returns across a market cycle in a more predictable fashion.
