Growth or Value: Where Do We Go From Here? | Mackenzie Investments

Market Insights from the Mackenzie Canadian Growth Team

Growth or Value: Where Do We Go From Here?


Key Takeaways

  • Based on the muted diversion between styles in the U.S. over the last seven years, the Mackenzie Canadian Growth Team does not see compelling evidence for a nearterm mean reversion based outperformance of either style.
  • Since 1992, each style has had one well-defined period of significant relative outperformance followed by an equally material downturn.
  • When style indexes are created, each company in the underlying index is classified as either pure growth, pure value, or else they overlap both. This wrinkle leads to concentration primarily in three sectors that are unique to each style.

We have received a number of inquiries from investors about the impact of investment style (growth versus value) and whether we have a strong opinion as to the relative performance of the two styles going forward. The short answer is: We do not. But it’s important to outline our thinking on why we don’t have a strong opinion either way.

The long-term chart below shows the performance of the Russell 1000 Growth and Value Indexes for the US market. Two strong “style markets” stand out over the past 25 years:

  1. In the late 1990s, growth stocks, fuelled by the technology bubble, outperformed value stocks in a period of speculative excitement linked to the promise of the “new economy”. The tech bubble peaked in 2000, after which technology valuations rapidly came back to more normal levels and the market shifted to a value focus.
  2. Subsequent to the technology bubble, we were in a strong value market. A China-driven commodity super cycle saw a barrel of oil spike from below US$20 to a high of more than US$140, resulting in the energy sector rallying over 300%.

The global financial crisis and the collapse of the US financial sector ushered in a more “style neutral” market, with both growth and value providing strong performance during the post-crisis recovery.

Date RLG Index RLV Index
August 31, 1992 200 200
September 30, 1992 201.95 202.26
October 30, 1992 204.83 201.98
November 30, 1992 213.3 207.62
December 31, 1992 214.83 211.94
January 29, 1993 212.39 217.79
February 26, 1993 208.52 224.7
March 31, 1993 212.06 230.63
April 30, 1993 203.49 227.23
May 31, 1993 210 230.97
June 30, 1993 207.49 235.55
July 30, 1993 203.77 237.75
August 31, 1993 211.58 245.3
September 30, 1993 209.6 245.1
October 29, 1993 215.37 244.53
November 30, 1993 213.41 238.48
December 31, 1993 216.7 242.54
January 31, 1994 221.5 251.44
February 28, 1994 217.05 241.82
March 31, 1994 206.07 232.18
April 29, 1994 206.84 236.27
May 31, 1994 209.52 237.87
June 30, 1994 202.92 231.68
July 29, 1994 209.7 238.27
August 31, 1994 221.04 244.09
September 30, 1994 217.44 235.41
October 31, 1994 222.28 237.96
November 30, 1994 214.78 227.38
December 30, 1994 217.99 229.24
January 31, 1995 222.37 235.71
February 28, 1995 231.44 244.05
March 31, 1995 237.63 248.76
April 28, 1995 215.7 240.74
May 31, 1995 251.1 265.69
June 30, 1995 261.18 268.56
July 31, 1995 269.24 277.27
August 31, 1995 270.41 279.95
September 29, 1995 280.87 289.61
October 31, 1995 283.64 286.1
November 30, 1995 292.5 299.27
December 29, 1995 294.4 306.46
January 31, 1996 305.55 315.4
February 29, 1996 309.51 316.56
March 29, 1996 312.93 321.41
April 30, 1996 317.57 322.02
May 31, 1996 326.97 324.82
June 28, 1996 330.09 324.47
July 31, 1996 313.75 311.65
August 30, 1996 315.55 319.32
September 30, 1996 337.7 331.39
October 31, 1996 339.27 343.51
November 29, 1996 365.1 367.28
December 31, 1996 357.15 361.61
January 31, 1997 382.08 378.72
February 28, 1997 381.03 382.95
March 31, 1997 359.52 368.72
April 30, 1997 380.96 383.39
May 30, 1997 407.99 403.65
June 30, 1997 426.92 420.2
July 31, 1997 459.12 450.84
August 29, 1997 434.03 433.58
September 30, 1997 457.08 459.11
October 31, 1997 449.78 445.44
November 28, 1997 465.21 464.37
December 31, 1997 460.65 477.09
January 30, 1998 485.05 469.71
February 27, 1998 507.05 500.39
March 31, 1998 534.31 530.47
April 30, 1998 537.8 532.88
May 29, 1998 518.35 524.05
June 30, 1998 558.33 529.92
July 31, 1998 544.79 520.03
August 31, 1998 487.71 441.41
September 30, 1998 480.06 465.94
October 30, 1998 549.58 501.08
November 30, 1998 590.67 523.6
December 31, 1998 632.99 540.09
January 29, 1999 669.66 544.67
February 26, 1999 638.88 535.56
March 31, 1999 671.86 545.77
April 30, 1999 672.81 596.39
May 31, 1999 646.93 588.31
June 30, 1999 697.51 604.92
July 30, 1999 673.91 586.24
August 31, 1999 684.85 563.26
September 30, 1999 670.08 542.77
October 29, 1999 720.27 572.15
November 30, 1999 758.12 567.34
December 31, 1999 837.24 569.17
January 31, 2000 797.61 550.14
February 29, 2000 836.143 507.837
March 31, 2000 894.363 568.044
April 28, 2000 852.502 561.109
May 31, 2000 809.604 565.812
June 30, 2000 871.717 538.414
July 31, 2000 833.008 544.853
August 31, 2000 909.437 574.061
September 29, 2000 822.627 578.386
October 31, 2000 784.074 591.971
November 30, 2000 668.255 568.788
December 29, 2000 646.71 596.549
January 31, 2001 691.368 597.979
February 28, 2001 573.69 580.161
March 30, 2001 511.09 559.092
April 30, 2001 575.717 585.777
May 31, 2001 566.925 597.686
June 29, 2001 553.643 583.81
July 31, 2001 539.353 581.783
August 31, 2001 494.914 557.165
September 28, 2001 445.217 517.291
October 31, 2001 468.357 512.088
November 30, 2001 512.977 540.659
December 31, 2001 511.568 552.452
January 31, 2002 502.346 547.304
February 28, 2002 481.037 547.043
March 29, 2002 497.413 572.239
April 30, 2002 456.653 551.854
May 31, 2002 445.285 553.471
June 28, 2002 403.693 520.885
July 31, 2002 381.29 471.608
August 30, 2002 382.125 473.879
September 30, 2002 342.06 420.439
October 31, 2002 373.191 450.51
November 29, 2002 393.107 477.52
December 31, 2002 365.443 455.819
January 31, 2003 356.314 443.958
February 28, 2003 354.196 430.961
March 31, 2003 360.45 430.855
April 30, 2003 386.881 467.83
May 30, 2003 405.813 496.744
June 30, 2003 410.919 502.128
July 31, 2003 420.905 508.441
August 29, 2003 430.973 515.199
September 30, 2003 425.952 509.237
October 31, 2003 449.492 539.235
November 28, 2003 453.762 545.276
December 31, 2003 468.902 577.668
January 30, 2004 478.293 586.783
February 27, 2004 480.728 598.125
March 31, 2004 471.453 591.777
April 30, 2004 465.755 576.257
May 31, 2004 473.934 580.863
June 30, 2004 479.347 593.473
July 30, 2004 452.012 584.034
August 31, 2004 449.185 591.109
September 30, 2004 453.149 598.96
October 29, 2004 459.962 607.76
November 30, 2004 475.181 637.047
December 31, 2004 493.409 656.833
January 31, 2005 476.714 644.311
February 28, 2005 481.159 663.874
March 31, 2005 471.973 653.52
April 29, 2005 462.761 640.672
May 31, 2005 484.472 654.726
June 30, 2005 482.292 660.455
July 29, 2005 505.651 678.267
August 31, 2005 498.491 673.472
September 30, 2005 500.349 681.969
October 31, 2005 495.207 663.572
November 30, 2005 515.906 682.808
December 30, 2005 513.714 685.948
January 31, 2006 522.445 711.584
February 28, 2006 520.816 713.903
March 31, 2006 528.043 722.245
April 28, 2006 527.043 739.225
May 31, 2006 508.454 718.49
June 30, 2006 505.896 722.04
July 31, 2006 496.025 738.369
August 31, 2006 510.732 748.379
September 29, 2006 524.28 762.183
October 31, 2006 542.461 785.906
November 30, 2006 552.41 801.212
December 29, 2006 553.662 817.756
January 31, 2007 567.638 826.903
February 28, 2007 556.15 811.61
March 30, 2007 558.591 823.021
April 30, 2007 584.621 852.195
May 31, 2007 604.819 880.372
June 29, 2007 595.22 858.511
July 31, 2007 585.625 817.68
August 31, 2007 594.188 824.449
September 28, 2007 618.522 851
October 31, 2007 639.194 849.814
November 30, 2007 614.815 805.772
December 31, 2007 611.944 796.045
January 31, 2008 563.891 762.752
February 29, 2008 551.915 728.554
March 31, 2008 547.928 721.501
April 30, 2008 576.317 755.515
May 30, 2008 596.628 752.123
June 30, 2008 553.075 678.365
July 31, 2008 542.213 674.419
August 29, 2008 547.215 684.067
September 30, 2008 483.284 632.154
October 31, 2008 397.854 521.368
November 28, 2008 365.344 482.058
December 31, 2008 371.181 487.049
January 30, 2009 353.113 430.078
February 27, 2009 325.766 370.737
March 31, 2009 354.146 401.547
April 30, 2009 387.765 443.632
May 29, 2009 406.154 469.608
June 30, 2009 410.047 465.181
July 31, 2009 438.812 502.321
August 31, 2009 446.972 527.294
September 30, 2009 465.375 546.689
October 30, 2009 458.727 529.157
November 30, 2009 485.873 557.436
December 31, 2009 500.223 566.268
January 29, 2010 478.108 549.586
February 26, 2010 493.604 565.417
March 31, 2010 521.376 601.287
April 30, 2010 526.838 616.064
May 31, 2010 485.654 564.041
June 30, 2010 458.259 531.319
July 30, 2010 490.626 566.345
August 31, 2010 466.712 540.828
September 30, 2010 515.8 581.663
October 29, 2010 540.073 598.199
November 30, 2010 545.245 593.576
December 31, 2010 574.673 639.217
January 31, 2011 588.978 652.758
February 28, 2011 607.154 675.253
March 31, 2011 607.18 676.756
April 29, 2011 627.134 693.756
May 31, 2011 619.128 684.86
June 30, 2011 609.519 669.478
July 29, 2011 603.075 646.237
August 31, 2011 569.96 604.323
September 30, 2011 527.377 557.496
October 31, 2011 584.809 620.132
November 30, 2011 583.382 615.093
December 30, 2011 580.884 626.049
January 31, 2012 615.172 648.689
February 29, 2012 643.343 672.68
March 30, 2012 663.725 691.342
April 30, 2012 662.234 683.178
May 31, 2012 618.354 641.277
June 29, 2012 634.428 671.668
July 31, 2012 642.403 677.554
August 31, 2012 658.204 690.336
September 28, 2012 670.295 710.857
October 31, 2012 650.135 706.234
November 30, 2012 659.396 703.785
December 31, 2012 658.144 716.606
January 31, 2013 685.875 761.907
February 28, 2013 692.889 770.981
March 29, 2013 717.947 800.152
April 30, 2013 732.551 811.194
May 31, 2013 744.629 829.743
June 28, 2013 729.585 820.932
July 31, 2013 767.615 863.846
August 30, 2013 752.937 829.057
September 30, 2013 785.462 848.242
October 31, 2013 819.46 884.056
November 29, 2013 840.947 906.512
December 31, 2013 863.809 927.611
January 31, 2014 838.586 893.55
February 28, 2014 880.128 929.563
March 31, 2014 870.068 950.185
April 30, 2014 869.28 958.027
May 30, 2014 894.776 969.48
June 30, 2014 910.915 993.036
July 31, 2014 896.278 974.525
August 29, 2014 935.679 1007.924
September 30, 2014 921.05 985.215
October 31, 2014 944.516 1005.974
November 28, 2014 972.694 1024.031
December 31, 2014 961.344 1028.263
January 30, 2015 945.909 985.975
February 27, 2015 1007.256 1030.754
March 31, 2015 994.469 1014.733
April 30, 2015 998.649 1023.043
May 29, 2015 1011.002 1032.493
June 30, 2015 991.777 1009.874
July 31, 2015 1024.55 1012.872
August 31, 2015 960.77 949.839
September 30, 2015 935.693 919.189
October 30, 2015 1015.379 987.057
November 30, 2015 1016.381 987.988
December 31, 2015 1000.103 964.615
January 29, 2016 943.473 913.509
February 29, 2016 941.272 910.131
March 31, 2016 1003.249 973.65
April 29, 2016 993.183 992.772
May 31, 2016 1010.612 1005.096
June 30, 2016 1005.191 1011.76
July 29, 2016 1051.861 1039.501
August 31, 2016 1044.577 1044.399
September 30, 2016 1047.333 1040.236
October 31, 2016 1021.936 1022.589
November 30, 2016 1041.811 1077.789
December 30, 2016 1053.549 1102.492
January 31, 2017 1088.313 1108.877

Source: Bloomberg and Mackenzie Investments at January 31, 2017

The simplest way to think about the relative performance of growth and value is by assuming, as the chart above suggests, that style performance tends to revert to the mean. Unfortunately, this isn’t particularly helpful, as when looking at the post-crisis period, the gap between growth and value has been quite muted. This suggests to us there is no compelling advantage for either style (see table below).

Category 2010 2011 2012 2013 2014 2015 2016 CAGR
Growth 15% 1% 13% 31% 11% 4% 5% 11%
Value 13% -2% 14% 29% 11% -6% 14% 10%
+/− 2% 3% -1% 2% 0% 10% -9% 1%

Source: Bloomberg at January 31, 2017

There is another way to think about growth and value which we find somewhat more helpful now. If you look at the periods of strong growth and value performance, you will see the emergence of sector concentration within the respective styles.

Growth outperformance during the technology bubble and collapse was, naturally, centered on the technology sector. The mid-2000s value outperformance occurred during a period of strong energy sector performance and was followed by the global financial crisis, which hinged on the collapse of the US financial sector. These facts lead us to consider whether there is a significant difference in sector exposures between the Russell Growth and Value Indexes.

Value Index, 35%; Growth Index, 35%

Undergoing the analysis, we find an interesting wrinkle in style index construction. When style indexes are created, each company in the underlying index is classified as either pure growth, pure value, or else they overlap both (i.e., companies are included in both the growth and value indexes).

From a relative performance standpoint, a company that is in both indexes will at least partially, or fully, cancel itself out. For example, spreading the weight of Apple 50/50 between the growth and value indexes would leave no relative performance impact on either index. The chart below shows the sector weights of the growth and value indexes, excluding the “blended style” companies.

How Growth and Value are spread out across the Sectors

Category Growth Value
Information Technology 35 6
Consumer Discretionary 24 4
Health Care 17 4
Industrials 11 7
Materials 3 3
Consumer Staples 6 7
Real Estate 2 5
Telecommunication Services 0 4
Utilities 0 8
Energy 0 16
Financials 2 37

Russell 1000 Growth and Value Indexes, Source: Bloomberg at January 31, 2017

It is apparent that there are large differences in sector weights between the two investment styles and, unsurprisingly, the technology, energy and financial sectors are among the sectors with the biggest weight differences. This matches up perfectly with the “sector story” nature of the periods of relative growth and value strength outlined above. It seems reasonable to assume that, if we are heading into a period of strong growth or value performance, then we should expect very different relative sector performance going forward. A strong growth period should see strength in the Technology, Consumer Discretionary, and/or Healthcare sectors, while a strong value period should see outperformance of Financials and/or Energy.

Given the significant differences in rates of return between growth and value styles in the past, it is understandable that advisors are curious about the path forward. Based on the muted diversion between styles over the last seven years, the Mackenzie Canadian Growth Team does not see compelling evidence for a near-term mean reversion based outperformance of either style. Irrespective of which style outperforms going forward, it may be worth noting the sector concentrations of each style. This is an interesting side effect that investors may wish to consider when creating well-diversified portfolios.

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