Value vs Growth: history is on value’s side
A comment on the commitment to value stocks.
Written by Patryk Dyjecinski

IFA and Founder of Clara Wealth

What is a ‘value stock’? A value stock is a stock that trades at a lower price relative to its fundamentals, such as dividends, earnings, or sales. The most common measure of a stocks ‘value’ is the price-to-book value ratio (book value is the difference between a company’s assets and liabilities). This is the ratio used to add value exposure in Clara Wealth’s portfolios.

Conversely, a ‘growth stock’, is one that is expected to grow sales and earnings at a faster rate than the market average. Growth stocks often look expensive, trading at high price-to-book (and price-to-earnings) ratios.

Historically, value stocks have outperformed growth stocks, though recently that hasn’t been the case. In fact valuation spreads between growth and value stocks are the widest they have been since the turn of the Millennium (and in the late 1960’s before that). This can be seen in the 2 graphs below. The graphs show price to book-value (P/B) spreads between ‘value’ and ‘growth’ stocks for both US large and small as well as non-US large and small capitalisation stocks. 

While disappointing periods emerge from time to time, the principle that lower relative prices lead to higher expected returns remains the same. While this statement sounds simple in theory it is difficult in practice. As the 2 graphs above have shown, value investing can at times be psychologically difficult. It has even tempted some to question it as an investment strategy or declare it as dead.

We do not agree with this assessment. 

• Data covering nearly a century backs up the notion that value stocks—those with lower relative prices—have higher expected returns. On average, for the US market as an example, they have outperformed growth stocks by 4.54% annually since 1928 (see graph below).


• But there are no guarantees, and results vary over time. As we discussed above, stocks have recently outperformed value stocks. That outperformance has been a stark departure from long‑term averages
• While there’s no way to know where stocks are going next, value has trailed growth in the past before rebounding strongly. 
• We also note that market timing strategies usually fail in the longer term and do not argue to increase (or decrease) value exposure. We know that value has outperformed in the long term and ‘tilt’ our exposure towards value as we always would.

Logic and history argue for a commitment to value stocks, so investors can be positioned to take part when those shares outperform in the future.

Please contact me at Clara Wealth Management at contact@clarawealth.co.uk or on 0207 097 4968 if you want to find out more or have any comments.

Past performance is not a reliable indicator of future performance. The value of investments may go down as well as up and you may get back less than you invest.