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Value vs. Growth

10 June 2021

4 minute read

Why a diversified strategy that combines a blend of value and growth shares may be the best approach for long-term investors.

Who's it for? All investors

The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

What you’ll learn:

  • What is value investing?
  • What is growth investing?
  • Which style is best?

 

There are many approaches to share investing but over recent years the debate between growth and value styles has been the subject of a great deal of interest and discussion.

Value investing has long held an advantage over growth investing when considered over different stages of economic expansion and contraction. However, over shorter periods of time that are likely to be more relevant for today’s investors, the case for value is less clear. Since the great financial crisis that began in late 2007, growth shares have performed better than value shares but remember that past performance is not a reliable guide to future performance.

The ever-changing tides of the debate may lead investors to chase performance returns; because growth shares have outperformed over recent years, some investors may be tempted to plough resources into more growth-oriented companies. Consequently, some have even raised the question of whether value investing is dead.

So, which strategy is likely to produce higher returns for investors going forward? Ultimately, what matters is the relative returns over an investor’s time horizon, rather than the returns over the past decade or the past century. On that basis, predicting a winner is almost impossible.

In an attempt to reach a conclusion, we will look at the characteristics of both investment styles and take a more detailed study into why we have seen such a large divergence in performance over recent years.

What is ‘Value’ investing?

Value investors seek out companies whose share prices, in their view, do not reflect the true worth of the company and are therefore trading at a discount to either the market index (e.g. FTSE 100 Index) or their sector peers. The purpose of the value investor is to identify those businesses that may have fallen out of favour but where they believe the business is sound and capable of a turnaround.

Value investors need to exhibit caution to avoid ‘value traps’; firms in terminal decline, unable to implement positive change or complete a turnaround and therefore inevitably, destined to go bust. These shares will be necessarily cheap, but for a reason, as they carry greater risk.

What is 'Growth' investing?

Growth investing, on the other hand, looks to identify companies with the ability to continually grow their earnings over the longer term. These companies may be priced relatively high and typically pay little or no dividends to shareholders, preferring to reinvest profits back into the business.

In general, growth shares have the potential to perform better when interest rates are falling and earnings are rising although there is no actual correlation between interest rate changes and value versus growth performance. Over recent years these types of companies have been typified by the FAANG shares in the US (Facebook, Apple, Amazon, Netflix and Google) though any sector can have companies which share these characteristics.

During a cooling economy with rising interest rates and high input costs (such as raw materials, labour and capital expenditure on equipment), growth companies may become more vulnerable to lower earnings.

Which style is best?

In recent times, the growth style has performed better than the value style but note that past performance is not a reliable guide to future performance. It’s no surprise that this has come at a time of rapid technological change and concentration. Falling commodity prices, historically low interest rates alongside increasing adoption and penetration of ecommerce as well as technology have all been drivers.

Geographic differences

Sectors have an impact on style but another key input is geography; no one country’s share market is the same as another. For example, in Japan, there are higher numbers of information technology firms in the MSCI Japan Index when compared to the MSCI UK Index which has just over 1% information technology. Additionally, some countries have fewer international conglomerates relative to say the UK or US and are more domestically orientated.

Share markets thus will behave differently at different times. Recently, we can observe the MSCI USA Index perform better than other developed markets due, in no small part, to the growing proportion of technology companies in the index, such as Amazon whose earnings have unquestionably benefited from the pandemic. Note that past performance is not a reliable guide to future performance.

In contrast, the UK and Europe have fewer technology and consumer companies (those that offer items purchased by individuals and households) and instead have a larger focus on industrials, financials, materials, and energy companies. This differential in composition means we should look at more than just style if we wish to reap the benefits of global share markets.

Timing styles is difficult – diversification is key

Investment styles are inherently difficult to time. Few would profess to have a crystal ball enabling them to predict the future with any accuracy or conviction and we are no different. We therefore believe that a diversified strategy that combines a blend of value and growth shares (or funds) may be the best approach for long-term investors seeking to smooth their investment returns over time with the potential of higher returns with less risk.

We believe investors should look to judge their portfolios as a whole rather than as a sum of the individual parts thus avoiding over-reliance on a particular driver to dominate performance.

Ultimately, style is just another weapon in the investor’s arsenal.

Where to invest?

We believe that the best way to achieve your long-term investment goals is to have a diversified portfolio. To help you we’ve created our Funds List – it’s made up of funds we like from the sectors we believe are key to building a diversified portfolio. Within each sector, there’s a mix of investment focus and investment approaches to choose from. So why not take a look at our selection?

To diversify your investment, you may like to consider our own Barclays Ready-made Investments (RMI). The RMI are just one example of a range of diversified funds which allow you to select the level of risk you are most comfortable with. These multi-asset funds invest in passive funds across a range of asset classes and regions, offering a globally diversified one-stop solution for investors. Ready-made Investments are not the only funds that we offer and they won’t be appropriate for everyone.

Appendix: Annual returns for the MSCI USA Index

  Net total return (USD)
April 2016 to April 2017 17.4%
April 2017 to April 2018 12.6%
April 2018 to April 2019 12.7%
April 2019 to April 2020 0.4%
April 2020 to April 2021 47.8%

Source: FactSet, Barclays

Correct at the time of publishing.

These are our current opinions but the future, as ever, is uncertain and outcomes may differ. Past performance of the fund and its manager are not a reliable indicator of their future performance.

We don’t offer personal investment advice so if you’re unsure you should seek that independently.

Funds are designed for the long term so you should only consider them if you can stay invested for at least five years.

Plan & Invest is a service which creates and manages a personalised Investment Plan just for you. Whether your long-term goal is your child’s university education, retirement or just building a nest egg, all you have to do is tell us a bit about yourself and then, if your application is successful and you’re ready to invest, let our experts select and manage your investments. Please note that the minimum investment is £5000.

Read the Assessment of Value report [PDF, 683KB] for funds run by Barclays.

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