The balance between growth and value
Blackrock’s managing director and portfolio manager, Russ Koesterich, suggests rather than timing fluctuations between growth and value, aim for the middle.
With headlines focused on inflation and the Federal Reserve, rotations between growth and value stocks have become increasingly violent. In the short term, this should continue. While skilled market timers may try to beat these moves, a different strategy is to embrace the middle: growth at a reasonable price, known as GARP.
Since the start of the pandemic, being on the right side of the growth/value gap has had a profound impact on short-term performance. There have been at least four rotations, each lasting between four and eight months and resulting in outperformance for a style of between 15% and 50%.
That said, seen over a slightly longer horizon, the performance gaps have been much smaller. For example, on an annual basis, US large cap growth and value returned around 21%, with around 1% separating the two.
The relative post-pandemic performance between the two styles is even more telling. Using global indices, after many sharp reversals, the relative return between growth and value has simply returned to where it was in the spring of 2021 (see chart 1).
Global Value Stocks vs. Growth Stocks
Source: Refinitiv Datastream and MSCI, chart from BlackRock Investment Institute. January 14, 2022Notes: The line shows the relative performance of the MSCI World Value Index compared to the MSCI World IndexGrowth index. An increase in the level of the index means that value outpaces growth. The index is rebased on 100.
For investors less inclined to time these fluctuations, GARP offers several advantages. Since last March, whatever style is currently in vogue, high-beta stocks — stocks that show greater volatility than the market as a whole — low-quality stocks have generally underperformed.
Interestingly, these high-beta names are most visible at both ends of the value/growth spectrum. In other words, deep value as well as early or speculative growth tends to be high beta. Given that we are past the early stages of the bull market, when high beta stocks are typically rewarded, investors are likely better off with less speculative names.
Besides modest betas, the other argument in favor of GARP is reliability; historically, this is the most “all-weather” style of investing. As the past 18 months have demonstrated, equity-style rotations are often hostage to fluctuations in the economy.
At this point in the cycle, investors may want to moderate their macro risk. GARP has the advantage of generally working well in most environments.
A caveat to the GARP strategy: inflation. While GARP tends to outperform in most regimes, the historical exception has been where we are today, which is high and accelerating inflation. Research by my colleague Isabelle Liu suggests that during periods of exceptionally high nominal GDP (NGDP) and inflation, GARP can underperform, especially relative to value.
That said, growth and inflation are expected to moderate towards the middle of the year for a variety of reasons, including a substantial reduction in fiscal stimulus, as well as the possible easing of supply chain issues as as the current wave of Omicron passes and existing untapped labor pools can help fill a record number of job openings.
While near-term conditions are still supporting value, rather than trying to pivot every three months, the middle may be the most sensible place, at least in the longer term.
This Publish originally appeared on iShares Market Insights.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.