Value or Growth stocks?

Value or Growth stocks?

Edward H

Value or Growth stocks?

If someone asked you Value or Growth, how would you answer? What considerations would you make in coming to your answer? And would you be justified in deciding this? Well for most investors, these decisions are not made by them, but instead by their Financial Planner. My question is, how are THEY coming to this conclusion?

When considering a factor portfolio construction, the two major categories are value stocks and growth stocks. In the stock selection process, stocks are usually classified into these two groups, and depending on the stocks, further variations such as GARP (Growth at a Reasonable Price) or Income can be attributed.

Growth stocks demonstrate high growth characteristics, which include (but not limited to):

  • Being priced higher than the broader market
  • Having higher earnings or revenue growth records
  • Being less sensitive to economic conditions relative to broader market

Value stocks are stocks that are under-priced relative to the market, and often rely on fundamental analysis to make such a comparison, its characteristics include (but not limited to):

  • Being priced lower than the broader market
  • Currently priced below similar companies in the industry
  • Able to carry more risk than the broader market

Value and growth stocks performs differently in distinct market conditions. As shown below, the returns of growth stocks (represented by MSCI Australia Growth Index) are vastly different to the returns of value stocks (represented by MSCI Australia Value Index) at different time periods.

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