Over the past five years, the Russell 1000 Growth has returned an annualized six percent in excess of the Russell 1000 Value, and that outcome has Wall Street talking growth stocks in 2018.
Jason Pride, chief investment officer at Glenmede said, “Growth stocks have been on an extended run through the first half of this year, with high-flying companies like Facebook, Amazon, Apple, Netflix, Microsoft and Google well- outpacing the S&P 500. It appears high expectations are currently baked into the valuations being awarded to certain stocks, including the FAANGs. Those that are missing forecasts have felt the consequences.”
On Wall Street, there are always alternative views.
Robert Johnson, principal at the Fed Policy Investment Research Group, in Charlottesville, Va. said, “To paraphrase Mark Twain, I believe that the “reports of the demise of value investing is greatly exaggerated. In fact, I feel that the recent outperformance of growth over value signals that value is likely to outperform growth over the next few years.”
The key is factoring in the long-term view on growth versus value stocks, Johnson said. According to data compiled by Ibbotson Associates (using the Fama-French
growth and value indices), from 1928 through 2017, large cap growth stocks have returned, on average, 9.2 percent annually, while large cap value stocks have returned 11.3 percent annually.
“Think about that – over a 90-year period, value has outperformed growth by 2.1
percent annually,” Johnson said. “A dollar invested in 1928 in growth stocks would have
grown to $2,827 by the end of 2017, not bad. That same dollar invested in
value stocks would have grown to $15,525 by the end of 2017.”
The annual return difference was even greater for small cap growth and value stocks over that same time period. Small cap growth returned 9.4 percent annually and small
cap value returned 13.9 percent annually. For small cap stocks the volatility was about the same – 32.4 percent for growth stocks and 32.1 percent for value stocks.
Outperformance of large cap growth over large cap value can persist for a long period of time. Most recently, since 2010, growth outperformed value in 2011, 2014, 2015, 2016, and 2017. Value prevailed in 2010, 2012, and 2013.
“Highflying stocks like Facebook, Amazon, Netflix, Tesla and Google have driven the
disparity between growth and value stock performance,” Johnson said. “In the next ten years, there is a very high probability that a diversified portfolio of value stocks
will outperform a diversified portfolio of growth stocks. I believe growth investors should significantly lower their return expectations over the next few years.”
Growth Stocks Winding Down?
Another reason for skepticism on a widening gap going forward on growth versus value is sustainability. In short, growth stocks can’t sustain current upward growth, experts said.
Jean Paul Lagarde, portfolio manager at Faubourg Private Wealth in Metairie, La. said, “Growth has been a slam dunk, but it will not always be the case. Growth has had a favorable backdrop with the U.S., which has experienced its eighth sequential quarters of gross domestic product (GDP) acceleration measured year-over-year.”Additionally, second quarter earnings have been sky-high with the Standard & Poor’s (so far) reporting 10 percent sales growth and 25.6 percent earnings growth.
“For the NASDAQ, the numbers are even better,” Lagarde noted. “That said, it doesn’t mean that analysts should extrapolate the same growth rates well into the future. These types of growth rates are nearly impossible to produce on a sustainable basis, especially as you begin to compare against better and better performances in the prior periods.”
Insight On Value Premiums
Gaining insight on value premiums – especially concerning time horizon – should also be factored in to any discussion on growth versus value.
Michael Tanney, co-founder and managing partner of New York City-based Wanderlust Wealth Management said, “From 1928–2017, return difference between stocks with low relative prices (‘value’) and stocks with high relative prices (‘growth’) in the U.S. had a positive annualized return of approximately 3.5 percent. In seven of the last 10 calendar years, however, the value premium in the U.S. has been negative. Historically, the most recent period of underperformance of value versus growth has been reasonably middle-of-the-road in magnitude.”
Tanney is telling his clients that while a positive value premium is never guaranteed, the premium has historically had a higher chance of being positive the longer the time horizon observed.
“Even with long-term positive results though, periods of extended underperformance can happen from time to time,” he said. “Because the value premium has not historically materialized steadily or predictably, a consistent investment approach that maintains an emphasis on value stocks in all market environments may allow investors to more reliably capture the premium over the long run.”
In summary, Tanney said, stay the course, and don’t chase recent performance or momentum and trust that over the long run, value stocks will outperform.
“Shorter term, value is synonymous with higher quality,” he said. “When the next economic downturn or market shock occurs, you’ll sleep much better knowing you own high-quality businesses with tangible assets and services.”
Brian O’Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC’s Guide to Creating Wealth. He’s a regular contributor to major media business platforms. Brian may be contacted at email@example.com.
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