The evolutionary shift from active to passive investing has ended the feud between growth and value investors, according to a recent Bloomberg article which argues that “growth and value are now broken approaches that have the potential to create significant and unnecessary risk for many investors.”
The article explains that growth and value investing “came of age during the mutual fund-driven rise of active management in the 1980s and 1990s” but cites the following issues that have emerged:
- Growth/value classifications “create dramatic and potentially risky sector concentrations versus broader market averages”;
- Growth or value funds also push investors to take noticeably more single-stock risk than broader market averages;
- “Simply using U.S. small-cap measures such as the Russell 2000 Value or Growth indexes gets rid of the single stock overweight issue but does little to ameliorate the sector concentration issue.”
- These issues become important, the article argues, with respect to U.S.-listed ETFs, as almost 10 percent of all ETF assets under management are invested in products that track either equity growth or value indexes.
The takeaway, the article explains, is that “there is a significant amount of equity-market capital invested in indexes that have very concentrated sector and stock holdings. It’s easy to see how this happened,” it adds, citing how the technology story has dominated the “growth stock narrative since the financial crisis.”