In a world where the collective knowledge of humanity is one smartphone swipe away, consider this:
Sales of vinyl albums have been growing every year for the past decade. Book sales (the ones made with paper) rose 1.7 percent compared to last year. In June 2018, the classic Nintendo video game system outsold every other modern gaming console on the market.
Just as the sun rises and sets, what is old becomes new again. You see it in fashion, architecture, music, food, technology and more. The stock market is no different.
In football, every team’s coach has a unique philosophy when it comes to calling plays. Some coaches prefer to run the ball, some like to air it out, while others like to keep it balanced. Though every football team is playing the same game, there are different styles of winning. The same is true in the market. An investment style is simply a philosophy or set of rules that guides what stocks to purchase. A dividend-growth investing style, for example, would seek out companies that have a history of hiking up the amount they pay in dividends. A large-cap investing style would favor companies with massive market caps like Apple or Johnson and Johnson over small companies.
Today, there are funds and other products that allow investors to buy a basket of stocks that fit a certain style. Two of the most popular styles are value or growth (we’ll explain), and they’re sort of like the salt and pepper of investing styles. But for decades, the experts have argued — inconclusively — whether it’s better to add more “salt” or “pepper” to your portfolio. In recent years, that debate has taken on renewed intrigue as one style has been stealing the show for quite some time.
THE VALUE-GROWTH SPLIT
For more than a decade, value stocks, or slower-growing companies with solid fundamentals that trade at a discount to the overall market, significantly trailed returns of growth stocks, or rapidly growing companies that fetch premium prices due to their high potential for above-average growth far into the future. Utilities and financials tend to trade like value stocks, while technology and biotech companies typically trade like growth stocks.
Through the end of the third quarter of 2018, the Russell 1000 Growth Index, which is comprised of growth stocks of large U.S. companies, notched annualized returns of about 14 percent over a decade. The Russell 1000 Value Index, on the other hand, returned 9 percent over the same timeframe. By some measures, it is the worst stretch of underperformance for value-style investments in 80 years.
“This type of underperformance may lead clients and advisors to abandon style diversification, but we believe this is a big mistake as style tends to be very cyclical,” says Matt Wilbur, director of advisory investments at Northwestern Mutual.
THE CYCLE SPINS
Sure enough, as markets took a volatile turn in late 2018, there were signs a shift from growth and into value was afoot. In the final 6 months of 2018, the Russell 1000 Growth Index returned minus 8.24 percent, while its value index counterpart shed just 6.75 percent. High-profile growth companies like Amazon, Alphabet, Netflix and Facebook were among those leading the march downward after reporting earnings late in the year.
While it’s impossible to say if the past several months mark a changing of the guard, rising yields on U.S. Treasury bonds may help explain why growth stocks got a haircut late last year. During periods of rising Treasury yields, growth stocks have tended to sell off a bit more than the overall market. As the yields on bonds rise, paying a high price for uncertain returns far into the future on growth stocks becomes less attractive.
THE BIG TAKEAWAY
No, this is not a recommendation to switch your equity holdings from growth to value. Attempting to keep your portfolio in style will only send you on a wild goose chase. Instead, just own both.
“In the portfolios we manage we tend to be style neutral and encourage clients to resist the urge to make style bets,” says Wilbur.
Here’s why: Over the past 20 years (a wider period than the 10 years cited above) the Russell 1000 Growth Index notched annualized returns of 7.23 percent, while the Russell 1000 Value Index returned 7.64 percent. It’s basically a wash, with a slight edge toward value.
When you have a balance of growth and value in a portfolio, it’s like rocking a good pair of blue jeans: You’ll never be out of style.
No investment strategy can guarantee a profit or protect against loss.
Although stocks have historically outperformed bonds, they also have historically been more volatile. Investors should carefully consider their ability to invest during volatile periods in the market.