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Comparing the results of value and growth stock market indexes

  • Wiley Global Finance WILEY GLOBAL FINANCE
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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 stock market indexes.

Does It Make a Difference?

As reported in Table 1, the 31-year annualized return of growth-oriented large-cap U.S. stock was 9.91 percent (which represents the average of the Dow Jones Large Cap Growth Index and the Dow Jones U.S. Large Cap Growth Index). The Dow Jones U.S. indexes were formerly the “Wilshire” Indexes. 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 indexes in this study (Dow Jones Large Cap Value Index and Dow Jones U.S. Large Cap Value Index) had an average return of 11.66 percent over the period 1980–2010. Large-cap U.S. stock with a value orientation had a higher 31-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 $118,000 during this particular 31-year period.

The 31-year average annualized return of two midcap value indexes (Dow Jones Mid Cap Value and Dow Jones U.S. Mid Cap Value) was 13.51 percent, considerably better than the 11.27 percent average return of the combined midcap growth indexes. The difference in performance amounted to a value premium of over $234,000.

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

Year

U.S. Large-cap Growth1 (%)

U.S. Large-cap Value2 (%)

U.S. Midcap Growth3 (%)

U.S. Midcap Value4 (%)

U.S. Small-cap Growth5 (%)

U.S. Small-cap Value6 (%)

1980

39.70

24.88

47.89

23.56

48.71

22.58

1981

–11.13

1.98

–7.37

9.34

–12.18

13.36

1982

16.49

20.47

21.79

26.05

19.91

31.35

1983

19.15

24.23

22.22

28.33

21.64

37.86

1984

1.59

10.98

–7.60

3.47

–11.33

7.80

1985

32.59

31.13

32.69

31.87

27.51

35.71

1986

15.51

19.90

10.47

15.60

8.79

14.36

1987

6.02

1.46

0.82

3.20

–3.31

–2.01

1988

13.45

22.39

12.01

19.31

21.01

26.47

1989

32.53

30.18

24.93

24.08

18.04

17.62

1990

–0.73

–6.34

–9.21

–10.83

–14.73

–17.45

1991

37.93

24.87

51.88

38.90

49.95

39.36

1992

4.25

9.44

11.12

17.82

13.99

22.71

1993

0.57

16.39

15.29

15.29

16.23

20.12

1994

3.37

–1.73

–2.94

–2.43

–2.28

–1.81

1995

38.02

39.25

35.21

32.26

35.24

26.39

1996

23.59

22.53

15.65

22.42

10.71

24.66

1997

33.45

34.23

20.56

35.01

14.99

31.35

1998

42.15

16.66

9.43

5.04

5.34

–4.18

1999

36.64

3.08

57.46

–1.87

55.87

0.48

2000

–28.11

8.62

–21.75

26.85

–21.32

19.24

2001

–23.02

–5.75

–15.43

6.55

–8.27

12.75

2002

–29.15

–16.06

–28.62

–7.96

–33.72

–5.53

2003

28.49

28.21

43.52

35.05

49.76

45.26

2004

7.36

13.48

17.14

21.54

17.25

18.99

2005

4.84

5.42

15.61

8.17

9.23

5.99

2006

8.32

22.11

11.14

16.26

11.43

20.49

2007

11.50

2.21

14.13

–4.14

10.22

–7.96

2008

–38.46

–35.13

–42.78

–36.22

–39.12

–35.34

2009

37.98

15.67

46.57

36.43

40.69

41.13

2010

14.75

14.10

29.35

21.96

28.71

25.55

31-Year Annualized Return

9.91

11.66

11.27

13.51

9.93

14.13

Std Dev of Return

21.89

15.78

23.74

16.81

23.75

18.41

Growth of $10,000

$187,071

$305,169

$274,209

$508,700

$188,107

$601,860

1 Average of Dow Jones Large Growth Index and Dow Jones U.S. Large Cap Growth Index.

2 Average of Dow Jones Large Value Index and Dow Jones U.S. Large Cap Value Index.

3 Average of Dow Jones Mid Growth Index and Dow Jones U.S. Mid Cap Growth Index.

4 Average of Dow Jones Mid Value Index and Dow Jones U.S. Mid Cap Value Index.

5 Average of Dow Jones Small Growth Index and Dow Jones U.S. Small Cap Growth Index.

6 Average of Dow Jones Small Value Index and Dow Jones U.S. Small Cap Value Index.

Among small-cap U.S. equity indexes, the value premium over the 31-year period was an astonishing 420 basis points (bps); that is, a 31-year value return of 14.13 percent minus a 31-year growth return of 9.93 percent equals a value premium of 420 bps. With a 31-year annualized return of 14.13 percent, small-cap value turned $10,000 into $601,860, or $413,753 more than the ending balance in small-cap growth.

The annual returns in Table 1 reflect performance from one point-in-time (January 1, 1980) to another point-in-time (December 31, 2010). 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 the value indexes and growth indexes 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 1980 to 1984, large-cap value U.S. equity demonstrated a 432 bps premium over large-cap growth U.S. equity. Among midcap U.S. equities during the same period, there was a value premium of 422 bps. Among small caps, the five-year value premium from 1980 to 1984 was 1,110 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

5-Year Period

U.S. Large-Cap Equity

U.S. Midcap Equity

U.S. Small-Cap Equity

Growth1
(bps)

Value2
(bps)

Growth3
(bps)

Value4
(bps)

Growth5
(bps)

Value6
(bps)

1980–1984

432

422

1,110

1981–1985

662

819

1,693

1982–1986

452

556

1,241

1983–1987

260

509

1,007

1984–1988

337

532

818

1985–1989

96

277

388

1986–1990

15

228

152

1987–1991

330

63

118

1988–1992

118

18

18

1989–1993

44

130

9

1990–1994

29

98

9

1991–1995

123

111

71

1992–1996

330

228

377

1993–1997

243

360

519

1994–1998

602

263

214

1995–1999

1,217

897

831

1996–2000

160

314

304

1997–2001

312

684

485

1998–2002

599

912

889

1999–2003

979

919

1,098

2000–2004

1,615

1,988

2,056

2001–2005

859

849

1,121

2002–2006

737

466

864

2003–2007

207

517

346

2004–2008

287

102

112

2005–2009

172

325

139

2006-2010

198

316

132

Average Premium (bps)

33

67

33

67

30

70

Average Premium (bps)

316

476

284

575

220

756

1 Average of Dow Jones Large Growth Index and Dow Jones U.S. Large Cap Growth Index.

2 Average of Dow Jones Large Value Index and Dow Jones U.S. Large Cap Value Index.

3 Average of Dow Jones Mid Growth Index and Dow Jones U.S. Mid Cap Growth Index.

4 Average of Dow Jones Mid Value Index and Dow Jones U.S. Mid Cap Value Index.

5 Average of Dow Jones Small Growth Index and Dow Jones U.S. Small Cap Growth Index.

6 Average of Dow Jones Small Value Index and Dow Jones U.S. Small Cap Value Index.

 

As shown at the bottom of Table 2, large-cap value demonstrated a performance premium 67 percent of the time. The average five-year value premium was 476 bps. Conversely, large-cap growth outperformed large-cap value 33 percent of the time by an average of 316 bps.

Among midcap equity indexes, value also outperformed growth 67 percent of the time by an average of 575 bps (over five-year periods). When growth outperformed value (33 percent of the time), the margin of victory averaged 284 bps. Among midcap U.S. stocks, a value tilt has historically provided better performance than a growth tilt.

Among small-cap U.S. equity indexes, value beat growth 70 percent of the time by an average of 756 basis points (again, over five-year periods). However, when small-cap growth outperforms (30 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 831 bps. Overall, however, when small growth outperformed small-cap value, the average margin of victory was only 220 bps.

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 rolling 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 1980 and 2010, large-cap value indexes outperformed large-cap growth indexes 69 percent of the time over the 29 three-year rolling periods. Over twenty-two rolling 10-year periods, large value beat large growth 86 percent of the time. Among small-cap indexes, small-cap value outperformed small-cap growth in 69 percent of the three-year rolling periods, but 95 percent of the time over rolling 10-year periods.

Table 3: Frequency of a Value Premium Rolling Time Periods (1980–2010)

 

Frequency of Value Premium among Stocks

 

U.S. Large-cap Stock (%)

U.S. Midcap Stock (%)

U.S. Small-cap Stock (%)

31 One-Year Periods

55

58

65

29 Three-Year Periods

69

62

69

27 Five-Year Periods

67

67

70

22 Ten-Year Periods

86

95

95

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Article copyright 2011 by Craig L. Israelsen. 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 than 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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