Opportunity in Growth, Value, or Both? – Successful Wealth Strategies

Defining Growth & Value

For many, the growth and value styles of investing may be foreign terms. Let’s begin with defining them.

Growth companies tend to be those with revenues growing faster than their broader markets. They do not typically pay dividends and historically have been more volatile. Growth stocks are usually priced higher than the broader market because investors are willing to bet on their potential for continued earnings growth. In other words, pay up now for higher earnings later.

In contrast, value stocks are generally considered cheap compared to the broader market or their own intrinsic value. They tend to be more mature companies with less opportunity for earnings growth and compensate investors with dividend payments and the opportunity for the stock price to “correct” back to its perceived true value.

Do they work equally?

Looking back over the past 20 years (as shown in Figure 1), we saw the domination of the growth style. As a result, heading into 2022, many investors found themselves under-allocated to parts of the market that had underperformed in recent years, such as value stocks, and holding an overweight to those areas that had experienced a long stretch of outperformance, such as growth stocks.

That starting position was a disadvantage to many investors as several long-term trends were

reversed. In 2022, value stocks, which feature sectors like energy, delivered strong returns, while US growth stocks, which feature many stocks in the technology sector, struggled in comparison as the tailwind of falling interest rates dissipated.

While the broad trend favored growth stocks over the last two decades, looking closely shows that in the last three years, we’ve seen five significant and pronounced changes in leadership. This leads to the next question of whether there are specific environments that favor one style over the other.

Environments for Growth & Value

Growth stocks tend to do well when interest rates are low or falling. Low interest rates mean the cost of doing business is cheap, so it’s easier for these companies to reinvest, expand, and finance their growth. What makes growth stocks potentially attractive is the prospect of higher earnings in the future, a delayed return of cash flows for investors. This means growth stocks tend to be more interest rate sensitive, so periods of rising rates can be challenging as the cost of capital increases. Contrast this with value stocks, which characteristically tend to pay dividends. Since investors receive their anticipated earnings from traditional value stocks via dividends much

sooner, this equates to less interest rate sensitivity. All else held equal, a rising interest rate environment could make value stocks more attractive than growth.

Positioning the Portfolio

As we move through a slowing growth environment with an elevated risk of recession due to higher interest rates and continued geopolitical risks, heightened volatility is expected to remain. Under these conditions, portfolios that have been overweight growth stocks could look to balance that by adding value stocks or strategies to provide greater ballast within portfolios.

Tilting the portfolio towards one style or another could benefit portfolios, but not having exposure to a style when the market turns could be detrimental to the long-term goals of a portfolio. History has shown it’s inherently hard to time the markets, but it is easy to have time in the markets and maintain diversification across both growth and value. Ultimately deciding which style is better could be like choosing between two of your favorite superheroes—Spiderman and Wonder Woman. Each one has unique strengths and weaknesses, and as we enter a complex environment ahead, it is likely you need both.

Key Takeaways

Growth and value investing are two distinctinvestment styles. Growth focuses on fast growingcompanies that typically have higher prices today forhigher earnings later. Value focuses on more maturecompanies that are discounted to their perceivedvalue and tend to pay a dividend.
Growth tends to do better in low or falling interestrate environments while value tends to better inrising rate environments.
Portfolios may be imbalanced due to growth’sdomination over the past decade. Considerrebalancing the portfolio across growth and value.

Important Information

This is for informational purposes only, is not a solicitation, and should not be considered investment, legal or tax advice. The information in this report has been drawn from sources believed to be reliable, but its accuracy is not guaranteed, and is subject to change. Investors seeking more information should contact their financial advisor. Financial advisors may seek more information by contacting AssetMark at 800-664-5345.

Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results.Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss. Actual client results will vary based on investment selection, timing, market conditions, and tax situation. It is not possible to invest directly in an index. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Index performance assumes the reinvestment of dividends.

Investments in equities, bonds, options, and other securities, whether held individually or through mutual funds and exchange traded funds, can decline significantly in response to adverse market conditions, company-specific events, changes in exchange rates, and domestic, international, economic, and political developments.

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