Research tells us that value stocks tend to outperform growth stocks over long periods. Since 1979, the Russell 1000 Value Index has returned about 1.4 times the return of the Russell 1000 Growth Index1.
Since mid-2006, growth stocks have outperformed value stocks as defined by the Russell 1000 Growth and the Russell 1000 Value Indices2. Some analysts have explained this outperformance by arguing that growth stocks tend to trade at a premium when growth is “scarce.” Others believe that today’s low interest rate environment has made it easier for growth stocks to gain access to capital. We believe growth stocks have outperformed during this period because they were cheap.
Today, the spread between the average valuation multiple of growth versus value stocks is unusually wide, indicating that growth is now relatively expensive. We believe this relative value analysis shows that a significant amount of pessimism has been priced into the value segment of the equity market. For patient investors this represents an opportunity unlike any we have seen in many years.
The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.
1 Bloomberg, as of 5/4/2016↩
2 Bloomberg, as of 5/4/2016↩
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