Comparing the results of value and growth stock market indexes

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Whenever the topic of portfolio design is discussed, you can be sure that the issue of value investing versus growth investing will come up. It is an issue when considering how to invest in U.S. stock mutual funds and non-U.S. stock mutual funds.

The term value suggests that the investor is buying stock that is relatively less expensive, as opposed to stock that is relatively more expensive. The stock of a company that is classified as a “value stock” typically has a lower price-to-earnings ratio, which simply means that the stock currently has a lower price per share relative to the company’s earnings per share. Think of it as investing in the home that needs repair versus putting more money down for the glitzy house on the hill. Very simply, value stocks are priced more attractively. The real question is whether or not value stocks tend to outperform growth stocks.

Growth stocks are just the opposite. They have higher price-to-earnings ratios; thus, an investor who purchases a growth stock is paying a higher price per share because he or she believes the stock price might go even higher.

Clearly, value and growth are relative measures. In fact, evaluating a stock’s price (in value versus growth terms) is much like trying to determine if the price of a home you are interested in buying is priced right. Rather than wax philosophical, let’s focus on the results of actual value and growth US stock market indexes.

Does It Make a Difference?

As reported in Table 1, the 26-year annualized return of growth-oriented large-cap U.S. stock was 8.60 percent (which represents the average of the Russell 1000 Growth Index and the Lipper US Index of Large Growth funds). The term cap is an abbreviation of capitalization. Capitalization is the way in which stocks are size classified (large-cap, midcap, small-cap). Capitalization is calculated by multiplying the current price of a stock by the number of shares that have been sold to investors.

The two value-oriented large-cap U.S. stock measures in this study (Russell 1000 Value Index and the Lipper US Index of Large Value funds) had an average return of 9.03 percent over the period 1990–2015. Large-cap U.S. stock with a value orientation had a higher 26-year average return than large-cap U.S. stock with a growth orientation. This difference in favor of value is referred to as a value premium. There was a value premium among large-cap U.S. stocks, which translated into a total dollar premium of over $9,200 during this particular 26-year period (assuming a starting investment of $10,000).

The 26-year average annualized return of two midcap value measures (Russell Midcap Value Index and the Lipper US Index of Midcap Value funds) was 10.49 percent, considerably better than the 9.72 percent average return of the combined midcap growth indexes. The difference in performance amounted to a value premium of over $22,000.

Table 1: Annual Returns of Value and Growth U.S. Equity Indexes

Annual Returns S&P 500 Index 3-Month T-Bill Barclays Aggregate Bond Index U.S. Large Growth1 U.S. Large Value2 U.S. Mid Growth3 U.S. Mid Value4 U.S. Small Growth5 U.S. Small Value6
1990 (3.10) 7.53 8.96 (1.04) (6.07) (7.22) (11.08) (12.25) (18.09)
1991 30.47 5.37 16.00 39.31 27.59 55.42 32.83 50.89 40.30
1992 7.62 3.44 7.40 5.94 11.12 6.93 17.32 7.84 23.42
1993 10.08 3.00 9.75 6.77 15.67 12.64 14.74 15.62 19.92
1994 1.32 4.22 (2.92) 0.90 (0.90) (1.08) (1.72) (2.06) (1.13)
1995 37.58 5.47 18.47 36.05 35.80 36.60 29.31 33.77 23.58
1996 22.96 5.05 3.63 21.84 21.36 15.47 20.09 14.16 20.80
1997 33.36 5.06 9.65 29.04 31.83 16.94 28.52 12.09 30.30
1998 28.58 4.77 8.69 37.59 16.94 15.33 1.68 1.10 (6.58)
1999 21.04 4.63 (0.82) 33.99 9.07 62.51 5.92 52.13 0.20
2000 (9.10) 5.79 11.63 (21.05) 4.48 (13.94) 14.89 (15.34) 19.47
2001 (11.89) 3.43 8.44 (22.15) (7.09) (20.61) 4.53 (11.10) 15.61
2002 (22.10) 1.60 10.25 (28.00) (17.60) (27.94) (12.15) (28.95) (11.32)
2003 28.68 1.01 4.10 28.36 29.02 39.07 38.58 46.66 46.78
2004 10.88 1.37 4.34 6.88 14.25 14.76 21.63 12.55 21.45
2005 4.91 3.13 2.43 6.42 6.66 10.84 10.70 4.75 6.08
2006 15.79 4.71 4.33 6.90 20.27 10.84 17.94 12.00 20.31
2007 5.49 4.38 6.97 13.39 1.15 16.42 1.10 8.37 (7.18)
2008 (37.00) 1.37 5.24 (39.92) (36.93) (44.18) (39.08) (40.58) (30.87)
2009 26.46 0.15 5.93 37.86 22.33 44.47 36.98 36.25 26.79
2010 15.06 0.14 6.54 15.92 14.27 26.02 23.20 27.59 25.12
2011 2.11 0.05 7.84 (0.13) (0.89) (3.48) (2.95) (3.16) (5.16)
2012 16.00 0.09 4.22 15.59 16.69 14.59 18.42 14.77 16.81
2013 32.39 0.06 (2.02) 34.45 32.88 36.13 34.92 42.15 34.89
2014 13.69 0.03 5.97 11.69 12.23 9.91 11.85 3.79 3.63
2015 1.38 0.05 0.55 5.64 (3.74) (0.58) (4.90) (1.27) (7.32)
 
26-Year Average Annualized Return 9.29 2.89 6.26 8.60 9.03 9.72 10.49 8.32 10.19
26-Year Standard Deviation of Return 17.99 2.30 4.94 21.42 16.67 24.61 17.90 23.42 18.97
Growth of $10,000 $100,721 $20,999 $48,474 $85,435 $94,694 $111,584 $133,660 $79,878 $124,669

1 Average of Russell 1000 Growth Index and Lipper US Index of Large Growth funds
2Average of Russell 1000 Value Index and Lipper US Index of Large Value funds
3 Average of Russell Midcap Growth Index and Lipper US Index of Midcap Growth funds
4Average of Russell Midcap Value Index and Lipper US Index of Midcap Value funds
5 Average of Russell 2000 Growth Index and Lipper US Index of Small Growth funds
6 Average of Russell 2000 Value Index and Lipper US Index of Small Value funds

Among small-cap U.S. equity, the value premium over the 26-year period was an astonishing 187 basis points (bps); that is, a 26-year value return of 10.19 percent minus a 26-year growth return of 8.32 percent equals a value premium of 187 bps. With a 26-year annualized return of 10.19 percent, small-cap value turned $10,000 into $124,669, or $44,791 more than the ending balance in small-cap growth.

The annual returns in Table 1 reflect performance from one point-in-time (January 1, 1990) to another point-in-time (December 31, 2015). Clearly, many investors won’t invest for that length of time or that specific period of years, so it’s useful to examine performance in smaller time frames, such as five-year periods. The performance premium for value and growth are calculated in rolling five-year periods of time and are reported in Table 2.

The premium (whether growth or value) for each five-year period is shown in basis points. For instance, over the five-year period from 1992 to 1996, large-cap value U.S. equity demonstrated a 240 bps premium over large-cap growth U.S. equity. Among midcap U.S. equities during the same period, there was a value premium of 203 bps. Among small caps, the five-year value premium from 1992 to 1996 was 363 bps.

As shown at the bottom of Table 2, large-cap value demonstrated a performance premium 50 percent of the time. The average five-year value premium was 462 bps. Conversely, large-cap growth outperformed large-cap value 50 percent of the time by an average of 274 bps.

Among midcap US equity, value outperformed growth 55 percent of the time by an average of 462 bps (over five-year periods). When growth outperformed value (45 percent of the time), the margin of victory averaged 271 bps. Among midcap U.S. stocks, a value tilt has historically provided better performance than a growth tilt.

Among small-cap U.S. equity, value beat growth 73 percent of the time by an average of 487 basis points (again, over five-year periods). However, when small-cap growth outperforms (27 percent of the time), the difference can be large. For example, during the five-year period of 1995–1999, small-cap growth beat small-cap value by 860 bps. Overall, however, when small growth outperformed small-cap value, the average margin of victory was 324 bps.

A Few Words About Basis Points

There are 100 basis points in one percentage point. For example, Fund A has a return of 10 percent and Fund B has a return of 11 percent. The 11 percent return of Fund B is 100 bps higher than the 10 percent return of Fund A. Or if Fund A has a return of 10 percent and Fund B has a return of 10.01 percent, Fund B has a higher return by 1 bps. The basis point measurement system is the clearest way to compare returns.

Table 2: Value and Growth Premiums over 5-Year Rolling Periods

  U.S. Large-Cap Equity U.S. Midcap Equity U.S. Small-Cap Equity
5-Year Period Growth1(bps) Value2(bps) Growth3(bps) Value4(bps) Growth5(bps) Value6(bps)
1990–1994 66 212 84
1991–1995 47 254 68
1992–1996 240 203 363
1993–1997 186 212 404
1994–1998 405 123 131
1995–1999 898 1,160 860
1996–2000 167 302 128
1997–2001 239 229 572
1998–2002 438 417 667
1999–2003 770 698 897
2000–2004 1,285 1,689 1,943
2001–2005 771 1,112 1,239
2002–2006 692 693 848
2003–2007 176 59 14
2004–2008 237 130 307
2005–2009 131 94 15
2006-2010 167 141 52
2007-2011 412 251 234
2008-2012 169 102 115
2009-2013 340 114 357
2010-2014 44 56 177
2011-2015 219 5 262
Average Premium (bps) 274 462 271 462 324 487
Percentage of Time with Premium (%) 50% 50% 45% 55% 27% 73%

1 Average of Russell 1000 Growth Index and Lipper US Index of Large Growth funds
2 Average of Russell 1000 Value Index and Lipper US Index of Large Value funds
3Average of Russell Midcap Growth Index and Lipper US Index of Midcap Growth funds
4Average of Russell Midcap Value Index and Lipper US Index of Midcap Value funds
5Average of Russell 2000 Growth Index and Lipper US Index of Small Growth funds
6Average of Russell 2000 Value Index and Lipper US Index of Small Value funds

Summary

These results do not argue for eliminating growth-oriented assets from a portfolio. However, this analysis does suggest that a value “tilt” may be justified in the long run.

The long-run advantage of a value tilt is illustrated in Table 3. As the length of the investing period increases (from one-year periods to three-year rolling periods to five-year rolling periods to 10-year rolling periods), the frequency of a value premium increases.

For example, between 1990 and 2015, large-cap value outperformed large-cap growth 54 percent of the time over the 24 three-year rolling periods. Over 17 rolling 10-year periods, large value beat large growth 65 percent of the time. Among small-cap indexes, small-cap value outperformed small-cap growth in 73 percent of the five-year rolling periods, but 82 percent of the time over rolling 10-year periods.

Table 3: Frequency of a Value Premium Rolling Time Periods (1990–2015)

  Frequency of Value Premium among US Equity
U.S. Large-cap Stock (%) U.S. Midcap Stock (%) U.S. Small-cap Stock (%)
26 One-Year Periods 50% 50% 54%
24 Three-Year Periods 54% 58% 50%
22 Five-Year Periods 50% 55% 73%
17 Ten-Year Periods 65% 76% 82%
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Article copyright 2011 by Craig L. Israelsen (updated by author in 2016). Reprinted and adapted from 7Twelve: A Diversified Investment Portfolio with a Plan with permission from John Wiley & Sons, Inc. The statements and opinions expressed in this article are those of the author. Fidelity Investments® cannot guarantee the accuracy or completeness of any statements or data. This reprint and the materials delivered with it should not be construed as an offer to sell or a solicitation of an offer to buy shares of any funds mentioned in this reprint.
The data and analysis contained herein are provided "as is" and without warranty of any kind, either expressed or implied. Fidelity is not adopting, making a recommendation for or endorsing any trading or investment strategy or particular security. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before trading. Consider that the provider may modify the methods it uses to evaluate investment opportunities from time to time, that model results may not impute or show the compounded adverse effect of transaction costs or management fees or reflect actual investment results, and that investment models are necessarily constructed with the benefit of hindsight. For this and for many other reasons, model results are not a guarantee of future results. The securities mentioned in this document may not be eligible for sale in some states or countries, nor be suitable for all types of investors; their value and the income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates or other factors.

Value stocks can perform differently from other types of stocks, and can continue to be undervalued by the market for long periods of time.

Growth stocks can perform differently from the market as a whole and other types of stocks, and can be more volatile than other types of stocks.

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