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In the stock market, growth again overshadows value

IN THE never-ending tug-of-war between growth and value investing, growth has lately been the strong-armed winner.

This year, through the first quarter, for example, the Russell 1000 Growth Index returned over 15 per cent, again better than the also excellent return of just over 11 per cent for the Russell 1000 Value Index. And growth outperformed value for seven of the 10 years from 2009 through 2018.

Until the past decade, however, value stocks often outperformed growth, leading some proponents of the value style of investing to hope for a return to dominance. But there is no assurance that such a shift will happen soon.

Growth and value have specific meanings in the stock market: Value investing favours stocks that look cheap using metrics like the price-to-earnings and price-to-book ratios. Growth investing, on the other hand, favours stocks with higher than average annual increases in revenue and earnings.

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After months of rising stock prices, growth shares have become relatively expensive but not outrageously so, Jeremy Zirin, head of Equities Americas at UBS Global Wealth Management, said. They carried a price-to-earnings premium of 47 per cent over value stocks at the end of March.

That's high, he said, but nowhere near the 100 per cent premium that prevailed just before the stock market declines of 2000 and 2001. "We're not at the stage where growth is grossly overvalued," he said.

Investors can express their own growth or value preference through a wide range of exchange-traded funds. These include the Invesco QQQ ETF and the iShares Russell 1000 Value ETF. (Exchange-traded funds are a form of mutual fund that is priced all day on stock exchanges, unlike traditional mutual funds, which are priced only once daily, after the exchanges close.) Tech stocks like Facebook, Amazon, Apple, Netflix and Google, the so-called Faang stocks, are in the growth category. Despite a brutal stretch in late 2018, these stocks have been big stock market winners in the past several years.

"The major tech companies have outstripped expectations," said John Rekenthaler, vice-president for research at Morningstar. "Earnings have maxed or exceeded expectations."

Ed Yardeni, president of Yardeni Research, has been emphasising growth stocks but says: "My contrary instincts suggest we may want to overvalue value relative to growth."

One reason is concern about the strength of the global economy. "Generally, value has outperformed whenever there is anxiety about whether the economy can continue to grow," he said.

Value stocks typically come from industries where investors and analysts see problems; that's why the stocks are relatively cheap. The question is whether the problems are real or overblown, and whether price gains are likely. Currently, banks and other financial institutions, and oil and gas companies, make up a large part of the value stock universe.

Judd Peters, one of the managers of the Hotchkis and Wiley Small Cap Diversified Value fund, sees promise in both sectors.

Banks will become more profitable when longer-term interest rates rise, increasing revenue when banks lend money, he said. "We're at an historically low moment in terms of long-term interest rates," he said.

On the other hand, fund managers who favour growth investing can point to their recent performance records. Dan Davidowitz, for example, is manager of the Polen Growth fund, which returned an annualised 16.22 per cent in the five years through March 29, according to Morningstar.

Mr Rekenthaler expects that value stocks will again outperform growth stocks eventually. "If I had to bet, I'd bet on value stocks for the next 10 years," he said. But, he said, because there's no guarantee that he is right, investing in value stocks requires considerable patience. NYTIMES