For growth stock investors, it's been a heady time. Growth stocks recorded a total return of 33.5% for the year ended December 31, 2020, significantly eclipsing value's 1.4% showing. And over the past five years, growth has outperformed value by an average of over 8 percentage points.1
Does this mean that value investors should rethink their strategy? Probably not. As history has shown, leadership between growth and value tends to shift back and forth, depending on the stage of the market and economic cycle. Which of the two outperforms the other is ultimately attributable to their fundamental characteristics.
Growth and Value Defined
Growth stocks represent companies that have demonstrated better-than-average gains in earnings in recent years and that have the potential to continue delivering high levels of profit growth.
Value fund managers look for companies that have fallen out of favor but still have good fundamentals. The value group may also include stocks of new companies that have yet to be discovered by investors.
Growth or Value... or Both?
Which strategy -- growth or value -- is likely to produce higher returns over the long term? The battle between growth and value investing has been going on for years, with no definitive winner. History shows us that growth stocks, in general, have the potential to perform better when interest rates are falling and company earnings are rising. However, they may also be the first to be punished when the economy is cooling. Value stocks, often stocks of cyclical industries, may do well early in an economic recovery but are typically more likely to lag in a sustained bull market.
1 Source: DST Retirement Solutions, LLC, an SS&C company. Based on total returns of the S&P 500 Growth and Value indexes. 2 Source: ChartSource®, DST Retirement Solutions, LLC, an SS&C company. Based on 12-month rolling returns from 1990 to 2019. Growth and value stocks are represented by composites of the S&P 500/Barra Growth and Value indexes and the S&P 500 Growth and Value indexes, which are unmanaged indexes generally considered representative of growth and value large-cap stocks. It is not possible to invest directly in an index. Index performance does not reflect the effects of investing costs and taxes. Actual results would vary from benchmarks and would likely have been lower. Stock investing involves risk, including loss of principal. Past performance is not a guarantee of future results. (CS000047) Investing in mutual funds involves risk, including loss of principal.
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