Tawanda Mushore – Head of research at Seed Investments
It is not necessary to separate growth and value stocks as perceived asset classes, rather than viewing equity as a single asset class. Growth and value exist as different styles of equity investing.
Equity investments require a long-term horizon, patience, and an understanding of the merits of the investment. One can favour a particular investment style, but these characteristics still apply.
Performance between the styles is cyclical, and both value and growth can go through periods of under-performance. It is not beneficial to blindly assume growth or value will out-perform based on history. It is more important to understand the long-term drivers of future returns, and there is potential for one or both styles to benefit.
The protracted value under-performance and its magnitude makes it easy to have recency bias. Analysis over longer periods shows that, historically, value has out-performed more frequently.
In fact, 90 years’ worth of data from renowned academics Fama and French show predominantly value out-performance for most 10-year rolling periods used, with the exception of the Great Depression (1929 – 1939/40), the dotcom bubble (1989 – 1999) and the most recent period, which is also the longest (2004 – 2020).
This does not necessarily mean that things will revert to norm, but rather highlights the influence of recency bias. Value was also once untouchable, with long term data to back that view. However, things can change. Hence the need for patience and understanding performance drivers.
Technology-related businesses, for example, have been growing earnings and may continue to do so under current conditions. In value, bargains are available, which can drive future returns.
Not every stock whose price has been knocked down is a value opportunity, however. The investment thesis needs to be tested and retested to reap the long-term benefits for patient investors.
We favour quality growth companies in the current economic environment. Value is, however, an area we are watching closely, although we would not rush in.
We continue to look at equities as a single asset class but within that, identify areas of the market offering the most value. This is not based on price alone, but rather potential future returns.