Value and blend vs. value and growth – which is better?

You have previously suggested a mix of value and blend funds. However, Burton Malkiel states in his book “A Random Walk Down Wall Street” that value and growth are equal over time. His argument suggests that a mix of value and growth – not blend – with annual re-balancing would be a better strategy. Both you and Malkiel cite historical figures. Can you explain the difference in your point of view?


Great question. I cannot speak to the context of how it was stated but I would argue the premise that value and growth are equal over time.

Consider the following return figures from Dimensional Fund Advisors over the period of 1927-2011:

US Large Cap Value 10.03%
US Large Cap Growth 9.75%
US Small Cap Value 13.50%
US Small Cap Growth 8.8

As you can see, value has historically outperformed growth.

The use of value and blend funds enables us to take advantage of the value premium illustrated by the preceding figures. Of course, blend is a combination of the two so the same result could be accomplished with a mixture of roughly 3 parts value to 1 part growth. However you slice it up our recommendation is to tilt to value.

 

Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Compound returns have an assumed rate of return, are hypothetical, and are not representative of any specific type of investment. Standard deviation is one method of measuring risk and performance and is presented as an approximation. Past performance is not a guarantee of future results.

What are Value and Growth Stocks?

Stocks that trade at low prices relative to their fundamentals, including earnings, book values and other measure are value stocks.  Investors believe a stock is a good buy if it’s likely to return to its normal levels when the market comes to its senses and appropriately prices the stock.  Of course a stock could be underpriced for a reason and thus value stocks are considered more risky than, for instance, growth stocks.

Growth companies exhibit strong earnings growth and high profitability.  They typically retain earnings to invest in capital projects that drive growth.  From a fundamentals stand point growth stocks have a relatively high price-to-earnings ratio.  Google is a great example of a success story for growth stocks.

Although growth stocks are the most popular ones (and almost universally regarded as the safest investments), much research shows that historically, unpopular (value) stocks outperform popular (growth) ones.