Interesting to note the recent divergence in outperformance of Growth stocks to Value stocks. The chart below is a year to date view, using the IWF (iShares Russell 1000 Growth Index) and IWD (iShares Russell 1000 Value Index) ETF’s as proxies for index performance. Note that ETFs are not perfect proxies for index performance, but for this purpose are close enough.
I am beginning to wonder if we might finally be at the dawn of a growth cycle again. Growth stocks which have underperformed value for a long time now, breaking historical trends, are emerging as cash rich defensive names today. To date the IWF is outperforming the IWD by over 1200 basis points or over 12% where the IWF is down -7.61% versus -20.33% for the IWD.
On a one year basis (Trailing Twelve Months), growth still leads value, but as you can tell from the chart below, outperformance of the IWF that began in May 2008 collapsed during the meltdown in November.
The TTM out performance is attributable to performance since January 2009 as outlined in the 3 month and 6 month charts below. Interesting to note that Value held up over growth as markets tumbled the most through September, October and November last year.
The charts below show longer term 5 year and 9 year trends. The 9 year is just shy of nine years based on the inception of the ETFs themselves.
There are a number of factors that may be affecting this trend, and giving more support to growth companies in the years ahead. 1. Many Growth companies today are cash rich and light on debt, a powerful combination during a massive deleveraging. 2. With multiples in compression today’s markets offer growth names at very reasonable prices (GARP). 3. The Bush administration tax cuts on dividends promoted ownership of dividend paying stocks, which generally are Value companies. The repeal or lapse of that tax legislation may reduce the appeal of dividend payers for a sustainable period. 4. Herding. Investment managers frustrated by the excess years of outperformance of Value stocks are drooling at the chance to call the Growth story right even if they are early. It is hard to know how much of 2009’s out performance of Growth stocks has been a function of investment managers overweighting growth companies and bolstering their share prices. 5. Many growth companies are in the sectors poised to benefit from Obama’s infrastructure investments including technology, energy and healthcare.
Regardless of whether any of these reasons are accurate or not, or whether this trend will sustain itself, its is something to keep an eye on in the months ahead. The kind of divergence we’ve seen so far in 2009 might be more than an aberration. For more reading on a good discussion of Growth and Value try this recent Forbes article: Growth Vs. Value Re-Examined
All charts from Google Finance
Growth Vs. Value Re-Examined
Emily Schmitt, Forbes.com, February 12, 2009