It’s been a long time since “Value” has outperformed “Growth”. Over the last ten years through 6/12/19, the Russell 1000 Growth Index (RLG) has outperformed the Russell 1000 Value Index (RLV) by 334% to 227%. Some say, and we concur that now is the time for Value to shine once again.
So what is Value investing? According to Investopedia, Value investing is an investment strategy where stocks are picked based on the fact they appear to trade for less than their intrinsic or book value.
While we do acknowledge the statistical principle of “reversion to the mean”, we do think that the performance advantage of Growth could continue to persist for some time. Why? First, we believe the low interest rate environment that we have experienced over the last ten years should persist for some time. Even if rates go higher from here (which, in our view, seems unlikely over the next 6-12 months), they will remain at levels that are typically very low on a historical basis. Why does this matter? Because, through our analysis we have uncovered that Growth companies often have significant earnings potential in the future that is much higher than current results. We believe these future results need to be “discounted” to present using a discount rate. And, the lower the assumed discount rate, the higher the potential is for present value of those future earnings. So, in our view, lower rates disproportionately favor Growth over Value. Secondly, if growth slows (or even worse, we enter into a recession), earnings growth tends to become scarce. It would seem logical then for companies that can reliably grow earnings without a growing economy (or despite one) to demand a premium from companies that cannot deliver organic growth.
We look for secular growers (define), regardless of a growth or value label. Further, in our opinion, even growth should be purchased at “Value” prices. Labels can be useful, but to the extent that labels dictate investment strategy, that’s when we believe investors can encounter difficulties.
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The views presented herein are those of Validus Growth Investors, LLC and are provided for informational purposes only. The information is current as of June 2019 and is based on the economic and market conditions as of this date. The information is not intended as a discussion of the merits of a particular offering and should not assume that any discussion or information provided herein serves as the receipt of, or as a substitute for personalized investment advice from Validus Growth Investors, LLC or any other investment professional.
This material is provided for informational purposes only and does not constitute a solicitation. The material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any forecasts made will come to pass.
The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. The Index is completely reconstituted annually to ensure new and growing equities are included and that the represented companies continue to reflect growth characteristics. The Russell 1000 Growth Index is an unmanaged index and has no management fees, no transaction costs, and no withholding taxes. The Russell 1000 Value Index measures the performance of the large-cap value segment of the US equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. Comparisons to indices are inherently unreliable indicators of future performance. An investor cannot invest directly in an index.
Advisory Services offered through Lucia Capital Group (LCG), a registered investment advisor. Securities offered through Lucia Securities, LLC, an affiliated broker/dealer, member FINRA/SIPC. Validus Investment Advisors is a model portfolio advisor for LCG sponsored advisory programs and an affiliate of Lucia Securities, LLC. Registration with the SEC does not confer any particular level of expertise or training.