by Connor Darrell, Head of Investments

You often hear the terms “value” and “growth” thrown about when discussions of equity markets are taking place. We thought it might be helpful to discuss some of the differences between the two terms and the trends that have been observed in recent years.

Value and growth are merely two different investing styles that focus on different factors in deciding which stocks to buy. Value investors are typically more focused on stocks that are considered relatively inexpensive in terms of the price of earnings or assets on the company’s balance sheet. Growth investors tend to focus on future earnings growth prospects rather than the price paid for a security and will be willing to pay more for a company that has a perceived advantage in this regard. Often, a stock will not fit perfectly into one category, and will exhibit characteristics of both styles.

Throughout history, the two approaches have gone in and out of favor. Value stocks have outperformed in some periods, and growth stocks have outperformed in others. What is interesting however, is that the divergence between value and growth has seemingly become more pronounced during the course of the current bull market. Since the market bottomed in early 2009, growth stocks (as measured by the Morningstar US Growth Index) have returned an annualized 19.25%, while value stocks (as measured by the Morningstar US Value Index) have returned an annualized 15.99%.  =While this may not seem like a large difference at first glance, over 9+ years, this amounts to approximately $115,340 of additional appreciation on an initial $100,000 investment; a staggering number.

The reasons behind the difference can be explained by the rise of widely held “glamour” stocks in the IT and Consumer Discretionary sectors, which are dominated by social media, search engine, and online retail companies, and are massive components of most growth indices. However, before investors rush to purchase these stocks, we caution that over the long-term the playing field tends to level itself out. Over the last 20 years, the Morningstar US Core Index, which maintains a blended portfolio (containing both value and growth stocks) has outperformed both the value and growth style indexes.

As asset allocators, we can and should use all the data available to us to try and tilt a portfolio toward styles and sectors that are likely to enhance returns, but to jump into one style or sector with both feet can be a perilous proposition. When it comes to investing, a balanced, stable approach tends to win out in the end.