Growth vs. Value

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Monday, February 19, 2019

At Miller/Howard Investments, we believe successful investing requires both attention to current market fundamentals impacting stock prices as well as consideration of long-term market cycles and trends.

Take, for example, the growth vs. value style cycle. It is of particular interest to investors today as the FAANG-driven bull market seems to have hit a speed bump in October 2018.

Curious market observers will naturally look to previous inflection points in the growth vs. value cycle for clues to stock market behavior moving forward. Not surprisingly, we think we've seen this movie before. After the tech bubble burst in 2000-01, a five-year period where "growth" stocks convincingly outperformed "value" stocks came to a sudden end. Interestingly, the disparity between growth stock and value stock performance then and now — even after the debacle of the fourth quarter of 2018 — is extremely similar.

5 Year Cumulative Total Return Then and Now

Does this mean that the relationship is about to make a marked shift, "normalizing" the valuation of growth and value stocks? There are no pre-established rules. There are tendencies, there are generalities, there are probabilities, and there is analogous history.

There are also differences in conditions between the two periods. For example, in 2000–01 many of the lower-volatility or defensive stocks such as utilities were historically cheap. Utilities today are near record high valuations, so one would not expect a repeat of the early 2000s.

As many academics have shown, and as any person on the street knows intuitively, future returns are inversely proportionate to starting valuations. Consider another classic defensive group, consumer nondurables, a group that has recovered from extreme cheap valuations, but is now suffering from evolving consumer taste and habits, competition, excess supply, and changes in distribution. It offers, as a group, fairly dim fundamental prospects without excessive "cheapness" to counterbalance that.

So with these disclaimers out of the way, let's take a look at some charts comparing the growth vs. value cycle over the past 5 years compared to the 5-year period ending on December 31, 1999.

Growth has outperformed value over the past 5 years, with most of that outperformance occurring over the past 2 years.

5 Year Total Return

We saw a similar environment at the end of 1999 when growth stocks outperformed value. Compare the 5-year periods side by side again — 5-year returns as of December 31, 1999 (THEN), vs. 5-year returns as of December 31, 2018 (NOW). Note that most of the outperformance in both happened over the last 2-year period of the time frame.

5 Year Cumulative Total Return Then and Now

What happened after the trend reverted in 2000?

Below is a 10-year chart starting in the year 2000. Notice that the Russell 1000 Value Index turned positive by the end of the fourth year, while growth remained deep in negative territory. Growth returns remained negative throughout the 10-year period.

10 Year Cumulative Return

And here is the same chart extended to the past 25 years as of December 31, 2018. Despite including two periods of strong outperformance by growth stocks, total returns over this almost 25-year period are remarkably similar with growth only recently outperforming value.

25 year cumulative return growth vs value

Which leads us to make some general comments about interpreting market cycles. It's not to say that present flashes can't be reliable signals, but we believe it's more prudent to also consider longer-term cycles and market performance. The problem, of course, is that it is rarely obvious which signals could be indicative of future success.

As a result, we think it is important to understand your investments, create a long-term plan, and stay the course with your long-term goals and objectives.

Don't let market distractions steer you away from long-term success.


Gregory Powell, PhD, Deputy Chief Investment Officer, focuses on the firm's Income-Equity portfolios. Greg joined Miller/Howard after a distinguished 19-year career as a portfolio manager and director of research at AllianceBernstein. At AB he managed a team of 12 analysts and a suite of products with $11 billion in AUM, including equity income, long-only value, diversified value, and long/short hedge funds. He also served as head of fundamental value research there, redesigning the analyst role with an emphasis on investment success and training analysts in all aspects of the position. Prior to AB, Greg worked for 12 years at General Motors in Detroit and São Paulo, Brazil. He began his career as a senior economist and became general director of market research and forecasting. Greg holds a BA in Economics/Mathematics from the University of California, Santa Barbara, and a PhD and MA in Economics from Northwestern University.

© 2019 Miller/Howard Investments, Inc.

Investment products: are not FDIC insured - May lose value - Are not bank guaranteed

Opinions and estimates offered constitute Miller/Howard Investments' judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. All investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are risks inherent in any investment and there can be no assurance that any asset class will provide positive performance over any period of time. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer’s board of directors, and the amount of any dividend may vary over time. Dividend yield is one component of performance and should not be the only consideration for investment.

The information above is from sources deemed to be reliable and is provided strictly for the convenience of our investors and their advisors. These materials are solely informational. Legal, accounting and tax restrictions, transaction costs, and changes to any assumptions may significantly affect the economics of any transaction. The information and analyses contained herein are not intended as tax, legal, or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investment, or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. Any investment returns — past, hypothetical, or otherwise — are not indicative of future performance. Investment Decisions: Do not use this report as the sole basis for investment decisions. Do not select an allocation, investment discipline, or investment manager based on performance alone. Consider, in addition to performance results, other relevant information about each investment manager, as well as matters such as your investment objectives, risk tolerance, and investment time horizon.

Past performance does not guarantee future results.

DISCLOSURE

Investment products: are not FDIC insured - May lose value - Are not bank guaranteed

Opinions and estimates offered constitute Miller/Howard Investments' judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. All investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are risks inherent in any investment and there can be no assurance that any asset class will provide positive performance over any period of time. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer’s board of directors, and the amount of any dividend may vary over time. Dividend yield is one component of performance and should not be the only consideration for investment.

The information above is from sources deemed to be reliable and is provided strictly for the convenience of our investors and their advisors. These materials are solely informational. Legal, accounting and tax restrictions, transaction costs, and changes to any assumptions may significantly affect the economics of any transaction. The information and analyses contained herein are not intended as tax, legal, or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investment, or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. Any investment returns — past, hypothetical, or otherwise — are not indicative of future performance. Investment Decisions: Do not use this report as the sole basis for investment decisions. Do not select an allocation, investment discipline, or investment manager based on performance alone. Consider, in addition to performance results, other relevant information about each investment manager, as well as matters such as your investment objectives, risk tolerance, and investment time horizon.

Past performance does not guarantee future results.