There's a reason why people haven't had the “growth versus value” discussion in a while. For the past several years, both investment disciplines have tracked fairly closely, if you’re to believe the Russell 3000 data. Since the election results, however, things have changed. Disregarding the “whys” behind this for the moment, let's instead focus on the data itself.
The first quarter numbers from Morningstar show this vividly. On average, growth funds beat value funds by just under 5 percent. The disparity is more pronounced in the small cap arena, where the average growth fund exceeded a 5.5 percent return, while the average value fund languished at barely above break-even, after having been down more than 2 percent year-to-day just before the quarter end.
Such a variance in returns certainly prompts the more than justifiable return to a never-ending question of growth versus. value. The prevailing wisdom suggests that, over the long-term, although value does have a slight edge, growth does a good job holding up its end of the bargain. But a new definition of “risk” reveals unexpected truths regarding this time-honored axiom. Does value really have this so-called edge? Does growth really hold up to this new scrutiny?
Before we answer that, let's revisit this new definition of risk. In the old days, investment professionals focused on standard deviation. It was easy to calculate, easy to show on a graph and, for the most part, easy to understand. There was only one problem—it violated common sense. No one ever really believed exceeding your goal was risky. And they most assuredly rejected the notion that the greater your realized winnings, the greater your risk. There was only one real definition of risk: failing to meet your goal.
From this evolved the concept of “goal-oriented targets” (GOTs). GOTs focus exclusively on the true fear of every investor: missing your target. Therefore, in assessing any return analysis, we’ve done away with standard deviations. Rather, we’ve begun to focus on what's termed the GOT frequency, i.e., the probability of meeting or exceeding a specific GOT.
Let's look at growth versus value in terms of GOT. We’ll use the Russell 3000 daily return data for their growth and value indices (for rolling 5-year periods ending from May 30, 2000 through March 31, 2017). We find that the GOT frequency for a GOT of 0 percent (i.e., the index has a positive return) is 84 percent for value and 72 percent for growth.
Yes, that's an advantage for value, but no one will really complain about growth. More revealing is the GOT that yields a GOT frequency of 50 percent, which implies half the returns are less than the GOT and half are more; aka, the median of all rolling five-year returns. For the value index, that GOT is 7.14 percent (a nod to Babe Ruth?). For the growth index, that GOT is 4.20 percent.
The GOT analysis shows, on average, value performs roughly 3 percent better than growth. Hmm, maybe old Ben Graham was on to something after all.
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
