Page 12 - ISQ UK_October 2017

INVESTMENT STRATEGY QUARTERLY

Trading Places: Value & Growth

Andrew Adams, CFA, CMT, Senior Research Associate, Equity Research, reflects on the rally in
growth stocks over the past decade and highlights the tailwinds that are likely to keep them in the lead
over value for some time.

One fundamental decision to make when investing in the VALUE STOCKS
equity markets is whether to favor growth strategies or Value stocks trade at a discount to some calculated measure of
intrinsic value. They tend to have lower valuation multiples,
value strategies. The two styles represent contrasting
higher dividend yields, and lower expected future growth rates
approaches to stock selection, and this dichotomy often compared to growth stocks. Value investors feel there is a ‘margin
divides investors who naturally gravitate toward one or the of safety’ in buying a stock that is already trading below what
they believe it to be worth, but they have to be careful not to fall
other. However, either strategy can be a better choice in a into the ‘value trap’ of buying something that is ‘cheap’ for a good
favorable underlying environment, and having a portfolio reason.
tilted toward the right style at any given time can go a long Proponents of value stocks are quick to point out that they have

way to boost returns. First, though, it is important to outperformed growth stocks over the past several decades, but in
recent years that dominance has swung the other way. Since 2006,
distinguish between growth and value stocks.
the Russell 3000 Growth Index (a proxy for all U.S. growth equities)
has consistently outperformed its counterpart, the Russell 3000
GROWTH STOCKS Value Index, with few notable exceptions. That 12-year advantage
Growth stocks are companies expected to grow their sales and for growth has left many value investors wondering just when it will
earnings at a high rate, typically above that of the average stock in be their turn again. We believe there are a few fundamental
the market. Much of the growth stock’s worth is tied to its future reasons why growth has dominated over the past decade, and
earnings potential, which is why they tend to trade at higher than these tailwinds do not yet show material signs of reversing, which
average valuation multiples. Growth companies also usually opt to is why we continue to favor growth stocks.
reinvest profits back into their businesses instead of paying out
high dividends, and investors are okay with that because they FUNDAMENTALS STILL FAVOR GROWTH
believe they’ll be able to sell their shares for much more in the The broad stock market has performed quite well over the past
future as long as the company continues to grow. several years, pushing up valuations and offering fewer value

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