This is an excerpt from Growth vs. Value Stocks: Signs of Leadership Change on ETFguide TV with Lance McGray at Advisors Asset Management. This episode examines:
- Signs that could trigger a leadership change between growth and value stocks
- Capturing growth and value without sacrificing quality
- Understanding how diversification within strategies works
- Positioning your portfolio for a trend change
Ron: We’re pleased to have with us Lance McGray, Managing Director and Head of ETF Product with Advisors Asset Management, Lance, welcome to the program. It’s great to catch up with you.
Let’s begin by talking about growth stocks, which as you know, the tech sectors led the entire market. And as a relative comparison, growth has outperformed value stocks over the past one, three and five years are doing it again in 2020. However, some people and some observers believe that listen, at some point, this trend of growth over value, is gonna come to an end and that there’s gonna be a leadership change, how do you see it?
Lance: Yeah, absolutely, we agree. I mean you mentioned this fact that growth securities have outperformed, value securities one, three, five years. You can actually even take that back to 10 years. And if you look at the Russell 1000 growth verse its value counterpart, it’s actually outperformed by 250%. And when you think about that on an annualized basis, we’re talking 8% a year. So that is something that is, it’s certainly a deep hole that value security has have sort of put themselves in over the last 10 years.
But what’s really interesting is the conversations, starting to change, 10 years is a long time and there’s a lot of investors, a lot of professionals that quite honestly don’t remember what it was like when value was leading the charge, because it has been so long ago. But if you look back 50 years or so, there have been a number of instances like these where its gone value and growth, value and growth, value and growth. Now, obviously none have been as drastic as this, but to think that the growth trend is going to continue might be a little stretch, although it has been hard to ignore the Apples of the world, the Microsofts of the world and go against those stocks.
But it’s really looking for that catalyst that’s going to drive that value. What’s going to bring that sort of valuation gap, performance gap back in line. And the way that we look at is there’s really two things that we’re keeping a close eye on. Number one is, as I mentioned, valuations. You know, yes, rates are low, interest rates are low, but that has the ability to extend the multiples a little bit. But when you’re looking at growth versus value, obviously gross strategies are growth stocks tend to trade at a premium over value, but in the recent months, this has been essentially two X that of the valuations of value stocks. When in reality, or when in history that’s closer to 12, 13, 14%. The other thing that we’re really looking at, is good news on the COVID front. If there is more news, around a potential vaccine here at fall, that may be the catalyst to get the value securities up and running and close that disparity gap rather quickly. So those are really the two catalysts that we’re looking that could potentially change this 10 year trend that we’ve been in.
Ron: As you know, we’ve seen a drop off in stock market volatility and usually it’s in the defensive stocks, those value oriented stocks that tend to do a little bit better in choppy markets on a relative basis versus the growth stocks. So the question is, how do investors position their portfolios to capture both trends, growth and value?
Watch the full episode of Signs of Leadership Change: Growth vs. Value Stocks at ETFguide TV.