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Growth vs. Value Equities Insights: 3Q | 2019

By R. Crit Thomas, CFA, CAIA
U.S. Equities
road through the forest

Style Drivers

Conclusion: Our style drivers have been favoring Value over Growth for some time now. Since the end of 2016, Growth stocks have dramatically outperformed Value. This relative performance divergence has occurred despite relative earnings growth favoring Value. This divergence is depicted on page 22. We believe that Value stocks are positioned to outperform Growth over the next three to five years.

Our view on Growth vs. Value Equities are based on style cycle duration and returns, relative valuations and relative returns.

Style Cycle Duration & Return

  • Growth and Value style indexes have historically gone through extended cycles of relative outperformance and underperformance, typically lasting about seven years. Currently, the Russell 1000® Growth Index has outperformed Value for over 11 years, making it the longest cycle for either the Growth or Value index. Historically, style leadership changes have typically occurred near the end of an economic cycle as can be seen in the chart below.
  • Historical studies demonstrate that the Value style has outperformed the Growth style over long-term periods — domestic or international, large cap or small (Fama and French, et al.). With that historical perspective in mind, and after a long period of Growth outperformance, we believe that a shift toward Value may benefit long-term investors.

Value versus Growth

Sources: Frank Russell Company, Bloomberg

Relative Valuation

Comparative valuation is difficult, as Value sectors and stocks tend toward valuation measures that differ from Growth sectors and stocks. Price/Book Value is generally accepted as a key measure for determining whether a stock is considered Value or Growth, though due to accounting rules and other factors Book Value is becoming a less reliable measure. In recognition of this we have incorporated other valuation measures. While the degree of this combined signal is less extreme than P/B alone, it continues to favor the Value style over Growth.

Relative Valuation Measures and Relative Price/Book

*Ranked 1 through 5, where low numbers indicating Value historically cheap relative to Growth and high numbers indicating Growth historically cheap relative to Value.
Sources: Frank Russell Company, Bloomberg

Relative Fundamentals

  • Generally, relative price performance follows relative earnings. It is difficult to compare earnings between the Growth and Value indexes as the Value Index is more cyclical while the Growth Index is more stable. Yet as can be seen in the chart below, growth stocks have dramatically outperformed value, yet underlying earnings have not kept pace. Since the market bottom, the Growth index has returned over 300%, while underlying earnings are up less than 200%. Comparatively, the Value index is up approximately 200%, which is in line with underlying earnings growth.
  • Looking forward, bottom-up analyst estimates place a slightly higher rate of growth for the Growth Index versus the Value Index through 2021.
  • Another consideration for longer-term horizons is dividends. Dividend reinvestment has been a key driver to historical outperformance of the Value style over Growth. Currently, the Russell 1000® Value Index has a dividend yield that is nearly
    double that of the Russell 1000® Growth Index.

Russell 1000 Growth Index/Russell 1000 Value Index

Sources: Frank Russell Company, Bloomberg
*Normalization adjusts or rescales the values of different time series to a notionally common scale to allow for comparability.

Value Poised to Do Better?

Another way to look at the Growth versus Value story comes from The London Company. Looking at relative returns on a rolling 10-year basis, one can see that the performance of both the Small and Large Cap Growth Indexes is two standard deviations ahead of their respective Value Indexes. The last time we saw this was at the tail end of the Dot-Com boom.

Annualized Trailing 10-Year Relative Total Return and Annualized Trailing 10-Year Relative Total Return

Source: Frank Russell Company

This commentary is for informational purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security. There is no guarantee that the information is complete or timely. Past performance is no guarantee of future results. Investing in an index is not possible. Investing involves risk, including the possible loss of principal and fluctuation of value. Please visit for performance information current to the most recent month-end.

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About the Author

crit thomas global market strategist

R. Crit Thomas, CFA, CAIA

Global Market Strategist
Crit is responsible for examining and evaluating economic conditions, generating insights and providing a sharpened perspective on investment strategies for enriched portfolio construction.

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