Growth Versus Value: Dueling Investment Styles

by | Jan 18, 2021 | Market Commentary

There is a dichotomy of investment styles in the marketplace.  You’re either a growth investor or a value investor. Many investors, institutional and individual alike, tend to wear their style badge with honor. Since forever, it’s been growth versus value.

A growth investor believes that stock prices follow earnings growth. So, the faster the earnings growth the higher the stock return.

The value investor is focused on paying a low price. Everyone loves a deal, and value investors apply bargain shopping to the stock market.

Keeping count, value was the obvious performance winner from 2000-2009. Growth has been the obvious winner from 2010-2020.

Both sides tend to entrench firmly in their respective camps, rarely meeting in the middle.  It’s value versus growth, and it’s been like that for a long time. Yet, it shouldn’t be one or the other. It should be both. No investment consistently does best. That’s why we diversify.

Thus, diversification demands that a portfolio contain both growth and value investments.

Growth and Value

I have two kids, Ben and Harry. One day Ben is an angel and Harry is a demon. The next day they switch. Having two kids happy at the same time feels like the holy grail of parenting. Anyone know any secrets? (YouTube doesn’t count!)

Despite being opposites at times, we wouldn’t be the family we are today without both of them. Your investment portfolio is the same way. At Wright Associates, we construct investment plans to hold a variety of funds that we expect to work at different times. See this link and chart from the Visual Capitalist. As noted in the piece, “variety is the spice of portfolios.”

Each investment should bring its own quirks to the portfolio. When combined, these differences create the possibility for better outcomes. There should be a yin and a yang, there should be value and growth.

Today, no two investments exemplify the yin and the yang of a portfolio like QVAL and ARKK. QVAL attempts to generate returns with value stocks. ARKK, conversely, tries to produce returns with growth stocks.

Visually, here is how different the two portfolios look. The blue dots represent the US Stock Market, green is QVAL, and red is ARKK.

qval v arkk

We can sum up the difference between the two investments with two words: polar opposites. And one has done curiously well compared to the other in the last five years.

How well you might ask…

Growth versus Value

The dichotomy of ARKK and QVAL is striking, leading many to wonder why they own QVAL at all. It’s because a proper portfolio, invested for the long-term, should be all about diversification. In the long-term an investment plan needs to survive a wide variety of possible outcomes. Survival is the critical component.

ARKK has performed incredibly well. And not just against QVAL, but against everything. It has smashed records for returns and inflows. As it turns out, when a fund does extraordinarily well, the money flows in. We’ve seen patterns like this before in history. The trailing returns are nothing short of eye-popping. What we can’t say for certain is whether or not it will 1) continue, 2) exist in five years.

qval v arkk

On an annualized basis, QVAL has delivered 9.2% per year for the last five years, which is pretty much in line with long-term expectations. ARKK on the other hand has posted annual returns of 52.0% per year for the last five years, well above imagination.

Value as a style, for which QVAL is a shining example, tends to do well as the economy rebounds and economic expansion gets underway. Growth, for which ARKK is a shining example, has done well when money is cheap and that cheap money fuels new, fast growing businesses.

Why we own both growth and value

Portfolio’s should be built with complementary components. There should be a yin and yang. Owning both value and growth helps build a portfolio for the long-term. It’s like having all weather tires.

It was precisely due to diversification that client portfolios not only survived but thrived when the tech bubble popped. We’ve talked about why diversification doesn’t always feel good. (Hint: You own the good and the bad!!)

In our opinion, QVAL has a place in every portfolio. It serves two purposes. First, as a strong value component. Second, as an asset allocation option for medium sized US companies. We gain comfort in their education-first mentality. To wit, the easiest way to understand an investment is to read their book. We have. It makes sense.

Additionally, ARKK also has a place in most portfolios too. It serves as a very strong growth component and an asset allocation option for medium sized companies.  While it may be a bit speculative and risky, it can also have asymmetric payoffs like we’ve seen in the last five years.

Both funds are strongly contrarian, active, concentrated, research oriented, and capable of producing satisfactory long-term results. Having all these attributes, checks the box on what we like to see as we qualify investments. So, we own both.

Future Expectations

Ultimately, however, position sizing matters. It’s one thing to figure what to own, it’s another skill entirely to figure how much to own. Due to the high potential for high volatility in both funds, we try to keep position in each fund sizing to a maximum of ten percent of a client’s total investable net worth. Sizing may dampen the upside, but it also protects on the downside.

The ride up in ARKK may have been phenomenal. We’re glad we have been a part of it. It’s the ride down to watch out for. Trees don’t grow to the sky, and investments can’t keep up returns that will make them bigger than the markets they serve. On the contrary, QVAL may have disappointed the last five years. It’s been hard to hold for many. It’s the possible rebound we look forward to.

So, with an ever-present argument between value and growth, we say so what. Own both. Diversify. Sleep better at night. Either style is a critical to the make-up of the market and portfolios. If you’re ever wondering if you’re tilted too far in one direction, please call. We would appreciate the opportunity to help you understand what you own and why.

Happy New Year!

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