Value vs. growth; Beatles vs. Rolling Stones

Jun 20, 2014 @ 12:00 am

Runtime: 3:17

Beatles or Stones? Sgt. Pepper or Sticky Fingers? "Let it Be" or "Gimme Shelter?" David Koenig of Russell Investments asks, just as in music, why should you be forced to choose just one investment style?

Video Transcript

[MUSIC] We wrote a, paper recently, comparing value and growth investing to the Beatles and the Stones. In the context of the, the question that is often posed to somebody somewhat lightheartedly often, sometimes quite seriously about whether they prefer the, the Beatles or the Stones. To gauge a persons personality, and, and just their thought process. So we think about value and growth in a similar context, where some people might gravitate very strongly towards one of those styles, but for most of us really want to experience both. So it's less a question of the Beatles or the Stones. Value or growth, and more of value and growth. And then what quantities of these we want within our portfolios. Sure, well, we think it's important to include allocations to both. One for a diversified, well diversified portfolio. But secondly it's important to recognize that there's a great deal of academic literature that's studied the value factor and, and the outperformance of value over long periods of time. But style leadership tends to move in cycles. And there are extended periods where value will outperform. But there are also certainly extended periods where growth will outperform. So, if you look at five year rolling periods, for instance, you'll see a, a number of years of value leadership, and then handing off to a number of years of, of growth leadership. So by including allocations to both of these styles individually, an investor can express a tilt toward value or growth if that's their preference but maintaining exposure to both styles so that they have exposure to whichever style is le, leading across the cycle. Maintaining that diversification across styles is, is important over time, because of the fact of, that, that styles do move through these leadership cycles. So an investor who was fully allocated to value, for instance, based on their views about the long term outperformance of that particular factor, could experience significant periods of regret in the shorter term. And the medium term as well. If value were to underperform over that period. So, by maintaining a balanced exposure to both growth and value, with the particular tilts that an investor prefers that maintains that diversification over that that extended period. 2013 was a very strong year in, in the market with a small cap leading, but both small cap and large cap delivering as measured by the Russel 1000 and 2000 indexes. Delivering returns greater than 30% for the year. So it was a very strong year of returns and valuations did move up over that time period. So, coming into 2014 at Russell, we really saw 2014 as a year of validation, where we didn't expect to see significant, additional, multiple expansion. But we really wanted to see earnings come in over the year to justify those valuations and support them. and, and as a result of the higher valuations, we did expect to see some shift in leadership towards value in 2014, and some shift in leadership from small cap to large cap. Which is what we've seen so far this year. [MUSIC]

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