Value stocks have under performed growth stocks over the past decade. In the US, the annualised compound return has been 11.4% for value stocks, or those trading at a low price relative to their book value. That contrasts with 14.7% annualised compound return for growth stocks, or those with a high relative price. Is it time to switch out of value stocks and concentrate on growth stocks?
Academic research has told us that value stocks have a great expected return than growth stocks. That’s because there’s more risk investing in value. So it is very disappointing to see that growth stocks outperform value by 3.3% per annum for 10 years. For an investment of €100,000, that’s a difference of €38,357. That’s a lot of money.
From an investment point of view, how do the returns for value and growth stocks over the past decade compare with their long-term averages?
Looking at returns for the US value and growth indices below, we see that growth’s annualised compound return of 14.7% over the 10-year period ending September 2019 was much higher than its return since January 1979, at 11.3%. On the other hand, value performance over the past decade has been more or less in line with its historical average: 11.4% vs. 11.9%. We can see value has performed similarly to how it has historically behaved. It is growth stocks that have had very good recent returns relative to the long-term history. Investors maintaining an emphasis on growth stocks may be hoping this departure from the trend will endure, despite the historical long-term averages.
Performance of US value stocks in past 10 years and since 1979, and performance of US growth stocks over the same periods
While stock returns are unpredictable, there is precedent for the value premium turning around quickly after periods of sustained under performance. For example, some of the weakest periods for value stocks when compared to growth stocks have been followed by some of the strongest (see below). On March 31, 2000, growth stocks had outperformed value stocks in the US over the prior year, prior five years, prior 10 years, and prior 15 years. As of March 31, 2001—one year and one market swing later—value stocks had regained the advantage over every one of those periods.
The theoretical support for value investing is longstanding—paying a lower price means a higher expected return. However, realised returns are volatile. A 10-year negative premium, while not expected, is not unusual.
But history also tells us that changing course after a disappointing spell for known premiums can lead to missed opportunities. When those drivers of out performance have turned around in the past, steadfast investors have been rewarded. A key to successful long-term investing is sticking with your approach, even through difficult periods, so that you are there for the good times too.
We always recommend to our clients that you have a diversified investment portfolio. As well as different regions and industries, it may also include investing in value as well as growth stocks. As there is more investment risk involved in value stocks, we never recommend that someone invests 100% in value stock. As we have seen from historical data, the out performance of value by growth can turn around very quickly, so sit tight.
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