Is it time to switch from growth- to value-based strategies?

Image of people in the shape of an arrow

Growth and momentum strategies have, by and large, been the only game in town for the last five years, as evidenced by the meteoric rise of the NYSE Fang+ Index. Established in 2014, this benchmark contains ten high-octane growth stocks – America’s Facebook, Amazon, Apple, Netflix, Alphabet (the parent of Google), NVIDIA, Tesla and Twitter and China’s Baidu, Tencent and Alibaba. They are in various stages of their development, from relatively mature cash generator (Apple) to wildly profitable (Alphabet, Alibaba) to deeply cyclical (NVIDIA) to just breaking into profit (Netflix) to apparent cash-sink (Tesla).

NYSE Fang+ index exemplifies how successful growth strategies have been

Source: Refinitiv data

“Advisers and clients will know that ‘growth’ has left ‘value’ for dead. The questions to address now are whether this is going to change and – if so – when and why?”


Advisers and clients may not have the time or inclination to examine the shades of grey that characterise the different Fang+ names. They will know that ‘growth’ has left ‘value’ for dead. The questions to address now are whether this is going to change and – if so – when and why?

Growth strategies have easily outperformed value once over the past decade

Source: Refinitiv data.
*UK data based on MSCI UK Value and MSCI UK Growth indices.
**US data based on S&P 500 Value and S&P 500 Growth indices.

One-way traffic

There are two interrelated reasons for the predominance of growth strategies over the past decade.

  • First, economic growth has been modest at best, at least in the West, since the end of the Great Financial Crisis. Any company that has proved itself capable of providing growth in such an environment has thus become highly prized, by virtue of their relative scarcity.

  • Second, interest rates remain anchored at or near rock-bottom levels – even US interest rates seem destined to top out at 2.5% after the Federal Reserve’s policy U-turn back in January. This has three effects:

    • It encourages – or even obliges – advisers and clients to take more risk in search of a return on their money. This may make them more willing than usual to back companies that are growing their customers bases and revenues but that may still be in the red (and could remain there for a while yet) as there is less of an opportunity cost involved

    • Discounted cash flow (DCF) valuations for growth companies’ equity are boosted by low interest (discount) rates

    • The combination of these two provides a deep pool of capital, which start-ups can tap should it take longer to reach profit than expected, and which takes off the pressure to hit it big straight away

The chart below divides the value of the value index by the value of the growth index. If the line is rising then value is outperforming. If the line is falling, then growth is outperforming.

Growth stocks have rallied hard in 2019

Source: Refinitiv data.
*UK data based on MSCI UK Value and MSCI UK Growth indices.
**US data based on S&P 500 Value and S&P 500 Growth indices.

Growth stocks wobbled in the second half of 2018 as the Federal Reserve forced through a quartet of interest rate increases last year and value stocks began to briefly outperform. However, that return to the spotlight for value in the US, in particular, did not last long.

“No sooner had the Fed backtracked in January […] than growth stocks took flight again, to once more reflect the relative rarity of their sales or profit trajectories.”


No sooner had the Fed backtracked in January – inspiring monetary policy pauses everywhere from the UK to the EU to Canada to Australia to New Zealand – than growth stocks took flight again, to once more reflect the relative rarity of their sales or profit trajectories, fresh concerns over the globe’s wider economic prospects and how cheap money boosts discounted cash flow valuations.

Recipe for change

Yet sharp-eyed advisers and clients will note from the first chart that the NYSE Fang+ index has failed to recapture last year’s high and begun to slide again. This is not, however, offering succour to value-seekers, especially in the UK, where the MSCI UK value index trades below its summer 2007 peak.

Portfolio-builders may be struggling to find value among growth strategies, as regulatory pressure builds on some of the Fang+ names, tariff and trade worries weigh on others and Tesla, for one, faces fresh questions over its operating model.

But they do not seem to be stampeding towards value as there seems to be little by way of growth there to act as a catalyst for fresh share price gains.

And what is probably really needed for value to come into fashion may be some good, old-fashioned GDP growth with a dose of inflation thrown in. This would help unloved cyclical firms boost profits, generate extra cash and pay down debt or increase dividends. It would also mean that growth is easier to find, at least in nominal terms, and imply that the scarcity premium attached to the Fang+ names is no longer merited.

“A dose of inflation […] would also mean that growth is easier to find, at least in nominal terms, and imply that the scarcity premium attached to the Fang+ names is no longer merited.”


An acceleration in inflation has seemingly helped value stocks perform …

Source: Refinitiv data.
*UK data based on MSCI UK Value and MSCI UK Growth indices.
**US data based on S&P 500 Value and S&P 500 Growth indices.

… in both the UK and USA since the Great Financial Crisis

Source: Refinitiv data.
*UK data based on MSCI UK Value and MSCI UK Growth indices.
**US data based on S&P 500 Value and S&P 500 Growth indices.

A study of the last decade suggests that value names do show more signs of life when inflation is accelerating. That seems a long way away at the moment as global growth chugs along at best. But with oil price staying firm, central banks now discussing letting inflation run above target for a while and politicians leaning away from austerity and toward fiscal stimulus, the eventual return of inflation may not be quite as fantastical as it sounds today.

AJ Bell Investment Director

Russ Mould’s long experience of the capital markets began in 1991 when he became a Fund Manager at a leading provider of life insurance, pensions and asset management services. In 1993 he joined a prestigious investment bank, working as an Equity Analyst covering the technology sector for 12 years. Russ eventually joined Shares magazine in November 2005 as Technology Correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media, by AJ Bell Group, he was appointed as AJ Bell’s Investment Director in summer 2013.

Top