Equity Style Analysis: Growth vs. Value

Recent equity growth style outperformance may be testing the resolve many investors have to remain diversified. Although it is nearly impossible to predict when and to what extent these performance and valuation trends will reverse themselves, historically they have. Rather than try to predict future trends, investors should consider remaining diversified over the long term.


In the Near Term, Growth has Dominated Value

  • Growth stocks have significantly outperformed Value stocks over the prior two years, which is testing investors' patience to stay diversified.
  • On a trailing two-year basis, Growth has returned an impressive 17% annual average return—while Value had a -1% return.
  • While a majority of sectors have been positive, returns for Growth stocks have been overwhelmingly driven by the information technology sector.
  • FAANG stocks (Facebook, Apple, Amazon, Netflix, and Alphabet's Google) now account for nearly a quarter of the overall Russell 1000® Growth Index (27.7%).

All data as of June 30, 2020.


 

Russell 1000 Growth vs. Russell 1000© Value

Difference in Rolling 5-Yr Annualized Returns

Source: Factset. As of June 30, 2020. Growth represented by the Russell 1000® Growth Index and Value represented by the Russell 1000® Value Index. Past performance does not guarantee future results.


 

  • Since 1984 the average calendar year returns for Growth and Value have been 12.9% and 12.3%, respectively.
  • Growth and Value have equally outperformed the other, 18 to 18, since 1984.

 

Calendar Year Returns of Value vs. Growth

Source: Factset. As of December 31, 2019. Past performance does not guarantee future results.

Long-term Performance Slightly Favors Growth

  • Long term trends have recently reversed and now slightly favor Growth stocks, which have generated 11.72% annualized returns since 1984 compared to 11.37% for Value.1

 

Cumulative Return—Growth of $10,000

(12/31/83—06/30/20)

Source: Factset. As of June 30, 2020. Past performance does not guarantee future results.

Why Value? Relative valuations look attractive

  • Investors may be seeking to hedge late cycle risk.
  • Relative valuation of Growth has not been as attractive since the dot-com bubble in 2002, which precipitated a long stretch of Value outperformance.
  • The last time Growth valuations were stretched to these levels was September 2003 and Value stocks more than doubled the total return of Growth stocks in the 5 years that followed (October 2003—September 2008).

 

Value Stocks May Be Attractive

Russell 1000 Growth and Value Forward Looking Price to Earnings Ratios (1998-2020)

Source: Factset, As of June 30, 2020.

Recent Growth outperformance may be testing the resolve many investors have to remain diversified. Although it is nearly impossible to predict when and to what extent these performance and valuation trends will reverse themselves, historically they have.

Rather than try to predict future trends, investors should consider remaining diversified over the long term.


1As measured by the Russell 1000® Value and the Russell 1000® Growth Indexes, respectively,  January 1984–December 2018 

Past performance is not a guarantee of future results.

Diversification does not ensure a profit or protect against a loss.

Forward price/earnings (or P/E) ratio is the ratio of the company's closing stock price to its estimated 12-month earnings per share.

This does not constitute investment advice or an investment recommendation.

Growth stocks may be more sensitive to market movements because their prices tend to reflect future investor expectations rather than just current profits. Growth stocks may underperform Value stocks during given periods.

Value stocks may perform differently from the market as a whole and may be undervalued by     the market for a long period of time.

Market prices of investments held by the Fund may fall rapidly or unpredictably due to a variety of economic or political factors, market conditions, disasters or public health issues, or in response to events that affect particular industries or companies.

The Russell 1000® Growth Index measures the performance of those Russell 1000 companies with higher price/book ratios and higher forecasted growth values. The stocks are also members of the Russell 3000® Growth Index.

The Russell 1000® Value Index measures the performance of those Russell 1000 companies with lower price/book ratios and lower forecasted growth values. The stocks are also members of the Russell 3000® Value Index.

The indices are unmanaged, are not available for direct investment and do not incur expenses.

AMG Funds LLC is a subsidiary and U.S. distribution arm of Affiliated Managers Group, Inc. (NYSE: AMG). 

AMG Distributors, Inc., a member of FINRA/SIPC

Not FDIC Insured | May Lose Value | Not Bank Guaranteed   

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YAFFX

Yacktman Focused Fund

The Fund seeks long-term capital appreciation and, to a lesser extent, current income by primarily investing in common stocks of U.S. companies.

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YACKX

Yacktman Fund

The Fund seeks long-term capital appreciation and, to a lesser extent, current income by primarily investing in common stocks of U.S. companies.

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