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Growth or Value – or just a different shade of investing?

Growth or value

For financial professionals only 

Trying to choose between growth and value investment styles is like choosing between a BMW or a Mercedes. Both are rewarding when driven, but they have different engines and different styles. The difference with growth and value is that when one style is in favour, the other is likely to be out of favour.

Growth investing has been in vogue for at least the last ten years, of which the last five have been the most pronounced. The chart below illustrates this trend well using the MSCI World Growth and Value indices. Despite the outperformance from growth investing, you can see value has delivered respectable absolute returns over the same period.

MSCI World Growth and Value Indices

Source: FE Analytics from 17/02/2010 to 17/02/2020, Bid-Bid, in Pounds Sterling

What is growth investing and why has it performed well?

Growth investors prefer companies that are expected to grow their revenues, cash flows or profits faster than the rest of the market. These companies tend to reinvest their earnings to expand their businesses, so dividends are not typically a priority.

The reason growth stocks have outperformed value stocks over the last ten years is largely down to low interest rates and loose monetary policies adopted by governments and central banks.  Take the US for example. Economic growth, while low, has been fairly steady and this has corresponded with excess global liquidity, helped by quantitative easing policies. Low interest rates have boosted capital investment in businesses, helping them to grow. In this environment, growth stocks have thrived.

What is value investing and why has it underperformed?

Value stocks typically refer to companies on low valuations or those trading at a discount to their underlying worth. These companies have become overlooked as investors need a catalyst to drive the company’s value up. This may be a change in corporate strategy or a new management. To some degree, macroeconomic factors have dominated the direction of travel for value (and growth) stocks.

Muted economic growth and low interest rates have been good for growth, and bad for value. To make matters worse, shocks to the global economy have proven detrimental for value.  The European Sovereign Debt crisis, the US mid-cycle slowdown (in 2015/16), Brexit and trade wars have sparked a flight to safety, causing a cyclical slowdown in areas such as industrials.  As many value stocks are economically sensitive, they have been overlooked, driving valuations to discounted levels.

What are the prospects going forward?

Value has endured a difficult ten years, but it has not always been this way. History shows that value can deliver periods of outperformance. The chart below looks at the MSCI World Value relative to the MSCI World Growth Indices over 20 years. When the line in the chart goes up, it means value is outperforming growth, and vice versa. In the period between 2000 (when the technology bubble burst) and 2007 when Lehman Brothers collapsed and the Global Financial Crisis began, value investing saw a period of outperformance relative to growth.

MSCI World Value relative to the MSCI World Growth Indices

Source: FE Analytics from 17/02/2010 to 17/02/2020, Bid-Bid, in Pounds Sterling

What has come as a surprise is the prolonged cycle of outperformance from growth stocks. Much of this has come from a handful of technology stocks known as FAANG (Facebook, Amazon, Apple, Netflix and Google). Some experts argue these are now expensive – and facing regulatory scrutiny could put them under pressure.

Additionally, US companies could also be facing an earnings slowdown, and this could signal a profit recession. If this spreads to the wider economy, it may prove deflationary in the short term. However, the growth in asset prices in recent years, potential for oil price rises, and deglobalisation/protectionism (caused by US trade wars and Brexit) should eventually prove inflationary. That environment, coupled with an economic recovery, may be what value stocks finally need for their long-awaited recovery.

How do we tackle the challenges of different styles of investing?

It is impossible to time markets, so we don’t choose one investment style over another. We look to blend different styles and strategies across different asset classes, geographies and market capitalisations. Diversification is a key objective, so when one style or market is overlooked, there will be others in favour. This means that when an unloved investment comes back into favour, our portfolios are positioned to take advantage of the opportunity. As ever, we operate within a risk framework, with the aim of delivering attractive risk adjusted returns over the longer term.

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