Return Gap Between Value and Growth at 25-Year High

The coronavirus pandemic has only deepened the performance gap between value and growth investing, which is now at the widest point in 25 years. This according to a recent article in the Financial Times.

Data cited from the wealth management firm Brewin Dolphin and Thomson Financial Datastream shows that value funds have returned 624% since 1995 compared to a 1,072% return from growth funds over the same period.

The article notes that value investing is “more sensitive to a slowing economy” than growth investing, which relies on innovation and competitive advantage—i.e. the FAANG businesses that have “created new sources of demand among consumers and have seen their share prices explode as a result.” In contrast, it explains, value strategies invest in a company’s potential: “the shares should be undervalued but poised to harness change.”

As to whether value is positioned for a comeback, the article concludes that many still believe in the strategy—with some analysts arguing that value stocks have become so cheap and undervalued that “it could be the opportunity to pick up shares before the investment style returns to favour.” It adds, however, that “others are skeptical, pointing to the widening performance gap.”

The article cites comments from John Moore, senior investment manager at Brewin Dolphin, who warns that while value investing “has a role in a balanced portfolio,” investors should be “selective when searching for value. A coming downturn could be good for value investors, because existing companies will make substantive changes to weather the storm and emerge stronger.”