NBK Wealth Thought Leadership: Public Equity – Value versus Growth Investing
Public Equity – Value vs. Growth Investing
Value and growth investing are two of the most widely discussed approaches to equity investing. They reflect fundamentally different philosophies about how markets behave and how investors can capture returns over time. Understanding the core principles that set them apart and how each performs in different market environments and market cycles can help investors make better decisions.
Value investing is based on the principle that the market does not always price securities efficiently. Sometimes, investor sentiment, market overreactions, or short-term uncertainty drive stock prices below their fair value. Value investors seek to take advantage of this mispricing by purchasing shares that appear cheap relative to their underlying fundamentals.
Growth investing takes the opposite view. Instead of focusing on what a company is worth today, growth investors concentrate on what it could become in the future. They seek businesses with the potential for above-average revenue or earnings growth, often driven by innovation, new technologies, or structural trends that reshape industries. Growth investors are comfortable paying a premium for such opportunities based on expectations that future profits will expand rapidly.
Different Market Environments Favor Different Styles
Both investment styles have periods when they outperform. Their relative success tends to alternate, reflecting the economic backdrop, monetary policy, and investor psychology.
Value stocks often do well when the economy is either recovering or expanding. In such periods, profits in cyclical industries rebound, interest rates may rise, and investors favor tangible earnings over long-dated expectations.
Growth stocks, on the other hand, typically outperform in environments characterized by low inflation, low interest rates, and strong investor confidence.
Growth investors are, in essence, paying today for the promise of tomorrow’s profits. Value investors, meanwhile, seek companies whose current fundamentals already justify higher prices than the market currently assigns.
It is difficult to predict which style will outperform in the short term and therefore many investors choose to maintain exposure to both value and growth.
Performance Through the Decades
Historically, the market leadership between growth and value has tended to rotate over multi-year cycles. However, over the very long term, both styles have produced compelling results, but with different risk profiles. Specifically, value strategies have tended to offer lower volatility, while growth strategies have delivered higher absolute returns in recent years. In a historical context, growth is currently valued very highly relative to value.
Value and Growth Performance Jan 2000 – Oct 20251
|
|
Value |
Growth |
50/50 |
|
Return |
7.59% |
8.35% |
8.14% |
|
Volatility |
15.34% |
17.42% |
15.50% |
1. Source: Bloomberg, NBKW analysis of Russel 1000 Value and Growth TR indices.
The past performance of value and growth suggests that they complement each other, and past risk adjusted returns could have been improved by including both approaches in a diversified portfolio.
Valuation and Risk Profiles
The contrast between the two styles can be seen in their fundamental characteristics:
|
Style |
Typical Traits |
Key Sectors |
Risk Profile |
|
Value Stocks |
· Lower P/E and P/B ratios · Stable but slower earnings growth · Often pay dividends |
· Financials · Energy · Industrials · Consumer staples |
· Lower volatility · May lag in bull markets
|
|
Growth Stocks |
· High valuations · Rapid earnings and revenue growth driven by innovation |
· Technology · Healthcare · Consumer Discretionary
|
· Higher volatility · Greater potential upside |
Blending the Two: A Balanced Approach
For most retail investors, the practical question isn’t “Which is better?” but rather “What mix suits my goals and risk tolerance?”
· Conservative or income-focused investors might tilt toward value stocks for their stability, dividends, and resilience in downturns.
· Investors with longer time horizons or higher risk tolerance might lean toward growth stocks to maximize returns and capture innovation-driven opportunities.
An often-overlooked aspect of the value vs. growth debate is the behavioral element. Value investing requires the discipline to buy when sentiment is negative, while growth investing demands the patience to hold investments despite volatility. Both challenge investors emotionally as value investors must tolerate underperformance during momentum-driven bull markets, while growth investors sometimes must weather sharp corrections when optimism fades.
Ultimately, successful investing is less about choosing one philosophy over the other and more about maintaining consistency and adhering to a chosen approach through changing conditions.
Download news clippings here
