Yankees vs. Red Sox, Packers vs. Bears, Celtics vs. Lakers – throughout sports history, fans have witnessed intense rivalries that have lasted decades. Often, one team will dominate the rivalry for a couple years. Then a couple years later, the other team will have the upper hand, and the rivalry continues. The phenomenon of a rivalry is not unique to sports, and one of the strongest rivalries today can be found on Wall Street. The investment rivalry of Growth vs. Value has built up over the past few decades and lately the competition seems to be a bit lopsided. Although Value has struggled recently, the rivalry persists, and investors are left to wonder which style will outperform going forward.
The History of Growth vs. Value
In order to fully understand the rivalry between Growth and Value, we must first recognize the history. For decades, Growth stocks and Value stocks have been pitted against each other because they reflect fundamentally different investment philosophies. A Value stock is typically classified as a stock that is trading below its intrinsic value. In other words, it can be purchased at a discount and allows the investor to outperform the market as the stock increases in price to reach its intrinsic value. On the other hand, a Growth stock’s valuation is based on large earnings expectations and growth potential that is expected to outpace the market.
The stark difference in investment styles tend to create sustained periods where the strategies perform quite differently. As shown in figure 1, since Russell began tracking the difference between Growth and Value in 1979, the average outperformance on a calendar year basis for either style is just under 10%. A material difference in investment philosophies and significant outperformance can create quite the rivalry.
A more recent story that emerges in Figure 1 is the outperformance of the Growth style. Since 2017, Growth strategies have outperformed Value strategies during four consecutive years, including 2020. Expanding our time horizon a little further, Growth strategies have been outperforming Value strategies since the recovery began after the Great Financial Crisis in 2008. While the recent outperformance of Growth has been significant, advocates of Value strategies will be quick to point out that starting in 2000, Value strategies outperformed Growth strategies for 7 consecutive years. These sorts of long-sustained cycles between Growth and Value have persisted through time and are one of the characteristics that make this such a great rivalry.
Which Side has Done Better?
As human beings, we tend to weight recent outcomes more heavily than outcomes in the more distant past. This tendency is referred to as recency bias, and the Growth vs. Value rivalry is a great example of this. Judging by the recent history, one would suspect that Growth strategies have drastically outperformed Value strategies throughout time. However, as depicted in figure 2, the performance is far more similar than most would expect. If an individual had invested $100 into the Russell 1000 Growth index in January of 1979, that $100 would be $12,522 as of the end of 2020. The same $100 invested in the Russell 1000 Value index would be $10,711. At first glance, a difference of almost $2,000 appears meaningful, however over a 40-year history that is only a difference of .42% annualized excess return. Even more remarkable is the fact that if this data were measured as of February 2020, the results would be flipped. The value of the $100 invested in the Russell 1000 Growth index would be $8,615, compared to $9,208 in the Russell 1000 Value index.
How to Account for the Rivalry in Your Portfolio
With an intense rivalry like the one we have witnessed between Growth and Value over the last 40 years, investors find themselves in a conundrum: How do they position their portfolio going forward? Typically, investors make one of two choices:
Establish a static allocation to both styles and keep it in your portfolio through time. This strategy has merit because over a longer time horizon, Growth and Value have provided similar performance. Which may also reduce the risk of underperforming the benchmark.
Actively tilt the Value and Growth allocations based on expected market outlooks. Although this strategy requires more due diligence and increases risk of underperformance, it could outperform because these styles have indicated that some environments are better suited for Growth or Value.
The optimal choice between the above options will vary for each investor and will be dependent on risk appetite and return expectations. For an investor more focused on reducing portfolio tracking error from the benchmark and limiting active management risk, Option 1 may be the correct choice. However, for an investor seeking higher potential returns and less concerned about active management risk, Option 2 may be the more prudent choice.
For those investors looking to outperform their benchmark, the second option tends to be the preferred choice. Investors looking to outperform are beginning to utilize a tactical manager that has demonstrated the ability to successfully shift between the Growth and Value styles over time. To represent the potential value of these tactical shifts, we simulated the performance of a manager that correctly shifted to the better performing asset class between Russell 1000 Growth and Value at the exact top and bottom of each cycle since 1979. The results are included in Figure 3.
Source: Balentine, Factset
Understandably, being able to time these decisions perfectly can have a significant impact on performance. However, experienced investors know that attempting to time the market is a futile effort. While timing the market is impossible, there are managers out there that have developed repeatable processes for capturing the majority of tactical shifts between Value and Growth – one example being Balentine’s proprietary Growth vs. Value hypothetical model that began in 1988 (figure 4).
Source: Balentine, FactSet
As shown above, a tactical model with a repeatable process for shifting between Value and Growth could provide significant value for an investor. A tactical model can be successful within asset classes like Value and Growth because the pair has displayed long, discernible cycles that enable tactical managers to outperform a static allocation. From January 1988 through December 2020, $100 invested in the Hypothetical Balentine Tactical Value and Growth strategy resulted in $8,344. This is compared to $3,655 for the Russell 1000 Growth index, $3,315 for the Russell 1000 index, and $2,623 for the Russell 1000 Value index. In terms of annualized return, the hypothetical model would have returned 14.4% from January 1988 through December 2020. This is lower than the 16.2% of annualized return for the simulated portfolio with perfect timing, however the hypothetical Balentine model still represents an excess return of over 300 bps versus the annualized return of the Russell 1000 benchmark (11.2%). Therefore, for those investors grappling with allocation decisions between Growth and Value and looking to diversify from a strategic asset allocation, there are tactical strategies available that could represent the most effective option, given the long, discernible Growth and Value cycles.
How the rivalry between Growth and Value will play out over the next couple of years is difficult to predict. The most important decision for investors is not which team will win the rivalry, but how effectively their portfolio is positioned to meet their return and risk objectives. Investors looking to improve upon strategic allocations should consider a tactical strategy, especially when considering an allocation to asset class styles that have displayed long, discernible cycles. With an appropriate Growth vs. Value allocation, investors can sit back and enjoy the game.
The views expressed represent the opinion of Balentine. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Balentine believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Balentine’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in equity securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.
The Russell 1000® Index measures the performance of the large cap value segment of the U.S. equity universe.
The Russell 1000® Growth Index measures the performance of the large cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-‐to-‐book ratios and higher expected earnings growth rates.
The Russell 1000® Value Index measures the performance of the large cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values.
Balentine LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Balentine’s investment advisory services can be found in its Form ADV Part 2, which is available upon request.
Model results are hypothetical and do not reflect trading in actual accounts and are prepared with the benefit of hindsight. The model performance is a blend of the iShares Russell 1000 Growth ETF (IWF) and the iShares Russell 1000 Value ETF (IWD). The model performance is shown for informational purposes only and should not be interpreted as actual historical performance of ADVISER. Model results do not represent actual trading in client accounts, nor do they reflect client-specific activities, such as contributions, withdrawals, or restrictions. In addition, such results may not reflect the impact that material economic and market factors may have had if accounts had actual been managed by ADVISER during the entire period portrayed. The actual returns experienced by individual clients will differ due to many factors, including individual investments and fees, individual client restrictions, and the timing of investments and cash flows. Neither past actual nor hypothetical performance guarantees future results. No representation is being made that any model or model mix will achieve results similar to that shown and there is no assurance that a model that produces attractive hypothetical results on a historical basis will work effectively on a prospective basis. Client should not rely solely on this performance or any other performance illustrations when making investment decisions. Actual performance may differ from model results.
The Simulated Tactical Portfolio is an illustrative portfolio that that correctly shifted to the better performing asset class between Russell 1000 Growth and Value at the exact top and bottom of each cycle. Theis simulated portfolio is not designed to represent actual performance. The simulated performance is a blend of the Russell 1000 Growth Index and the Russell 1000 Value Index. The simulated performance is shown for informational purposes only and should not be interpreted as actual historical performance of ADVISER.
I often meet entrepreneurs who spend decades using a disciplined, process-oriented approach to building their businesses and, as a result, accumulate great wealth. However, it’s remarkable how many of them devote more time to planning their next vacation than to choosing a wealth manager to steward the proceeds from their life’s work after a transition event.