Unlock the Power of Quantitative Strategies: Explore Our Cutting-Edge Website Today!

Asset Management

Value vs Growth: adversaries or complementary strategies?

Gonzalo Sainz Ponce

07/06/2023

No Comments

There is a myth that investors have to choose either Value or Growth, but considering both strategies as complementary rather than adversaries can be very beneficial for investors.

Introduction

Factor investing is an investment approach that seeks to capture specific attributes that determine the risk and return of investment portfolios. You may have heard of many other factors such as Quality or Momentum, but in this post we will focus on Value and Growth factors or investment styles to gain a better understanding of their characteristics, benefits and considerations for investors.

Value vs Growth

Value investing is an investment strategy based on seeking companies trading below their intrinsic value, which is an estimate of a company’s value independent of its current market price based on its fundamental characteristics and future cash flow potential.

Growth investing, on the other hand, is an investment strategy that seeks out companies that are expected to grow at an above-average rate compared to their industry or the whole market, accepting high levels of risk in search of strong returns. It generally focuses on future growth prospects and potential rather than current valuation parameters, in addition to profit margins, returns on equity (ROE) and share price performance.

With the help of ChatGPT we can easily get a summary table with the main features and differences of these two investment styles:

Value Investing vs Growth Investing: Features & Differences
Value Investing vs Growth Investing: Features & Differences

Exposure & Performance

In order to compare both investment styles, we will use the following ETFs as references for the period from 2018 to 2023 (similar results are concluded using other periods): Vanguard S&P 500 ETF (VOO), S&P 500 Value ETF (VOOV) and Vanguard S&P 500 Growth ETF (VOOG).

Firstly, an analysis of their current sector exposures reveals large differences in exposure to certain sectors. In particular, the high exposure to sectors such as IT and Health Care in the case of Growth, and Financials and Utilities in the case of Value. Nothing we couldn’t have expected given the characteristics of each factor outlined before!

Value Investing vs Growth Investing: Sector Exposure
Value Investing vs Growth Investing: Sector Exposure

Obviously, these differences in exposure imply some de-correlation, resulting in relatively different annual returns over time and with no clear evidence of which option is better in the long run. Generally, when economic conditions are good, growth stocks slightly outperform value stocks, while in more difficult economic times, value stocks tend to hold up better, as shown below. These differences could be expected, as we have already said that each factor tries to capture specific attributes that determine the risk and return of investment portfolios.

Value Investing vs Growth Investing: Yearly returns & Correlation
Value Investing vs Growth Investing: Yearly returns & Correlation

Combination

At this point, having seen that there is some de-correlation between the two investment styles, as value and growth stocks tend to outperform in different market environments, it makes sense that if we are able to combine both factors appropriately, we can create a balanced portfolio that performs very well.

For example, Growth at a Reasonable Price (GARP) is one of the best known investment approaches that combines elements of both Growth and Value investment styles. In particular, it tries to identify companies that exhibit strong growth potential but without extremely high valuations, and thus achieves better results than each factor separately.

Performance evolution of Value, Growth & GARP investment styles
Performance evolution of Value, Growth & GARP investment styles

Conclusion

The idea of this post was to detail the main features and differences between Value and Growth investment styles and, above all, to show the potential of mixing them when investing. I leave it up to you to find the combination that best suits your personal preferences!

0 Comments
Inline Feedbacks
View all comments