News & Insights

Value vs. Growth – The “Tails” Matter

During the first three quarters of 2020, large caps outperformed small caps, and growth outperformed value—in a big way. The performance gap between large growth and small value was extraordinary, as was the case over much of the last decade. The cause of the divergence appears to be investors’ preference for less economically sensitive companies and those with promising growth prospects, without regard for valuation. Record low interest rates in the period buoyed equities but benefited growth stocks disproportionately.

Since September of 2020, we have observed a major performance reversal, with small caps and value stocks outperforming large caps and growth stocks. Positive news on the pandemic, most notably vaccine approvals and distribution, triggered optimism about an economic reopening. This has benefited cyclically exposed value stocks. More importantly, many deeply discounted stocks that had been priced at near distressed levels have performed exceedingly well. We had outsized exposure to such stocks but only those that had the balance sheets and business models to endure a prolonged economic slowdown—this exposure has been a welcomed tailwind in the value recovery.

Despite value coming back into vogue recently, the valuation gap between growth and value remains wide because the starting point was so extreme. At the end of September 2020, the gap between small value and small growth was almost at an all-time wide. During value’s recent outperformance, the valuation gap moved from the 1st percentile to the 14th percentile. Accordingly, we believe value has longer to run. A continued reversion toward more normal/average valuation relationships could provide a powerful and enduring value tailwind.


Source: Bloomberg, Russell, H&W. 9/30/21 price divided by the sum of EPS for the last four quarters reported.

All investments contain risk and may lose value. This material is for general information only and should not be relied on for investment advice or recommendation of any particular sector, industry, security, strategy, or investment product.

The portfolio manager's views and opinions expressed as of March 2, 2021; updated September 30, 2021. Such views are subject to change and may differ from others in the firm, or the firm as a whole. The portfolio manager's comments include some estimated and/or forecasted views, which are believed to be based on reasonable assumptions within the bounds of current and historical information. However, there is no guarantee that any estimates, forecasts or views will be realized. Any discussion or view on an asset class/segment, industry/sector and/or investment type are not investment recommendations, should not be assumed to be profitable, and are subject to change. In the event of new information or changed circumstances, H&W reserves the right to change its investment perspective and outlook and has no obligation to provide revised assessments and opinions.

Investing in equity securities have greater risks and price volatility than U.S. Treasuries and bonds, where the price of these securities may decline due to various company, industry, and market factors. Investing in foreign as well as emerging markets involves additional risk such as greater volatility, political, economic, and currency risks and differences in accounting methods. Investing in smaller, medium-sized and/or newer companies involves greater risks not associated with investing in large company stocks, such as business risk, significant stock price fluctuations and illiquidity.

Value and growth investing styles will go in and out of favor during different economic environments. Growth investing tends to work well during speculative, momentum-driven markets, while value investing tends to work well following recessionary periods. Value stocks following a recession may start from a lower market value than growth stocks which can contribute to their outperformance. Past recessions and recoveries cannot predict or guarantee future performance due to different factors and circumstances.

Market Disruption: The recent global coronavirus pandemic has caused and continues to cause disruption in the global economy, unprecedented business and travel disruption and extreme fluctuations in global capital and financial markets. H&W is unable to predict the consequences of the upheaval caused by coronavirus pandemic, which, depending on the severity and the length of the outbreak, has the potential to negatively impact the firm’s investment strategies and reduce available investment opportunities.

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Past performance is not indicative of future performance.