June 2020

Value Investing
An investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.

Growth Investing
An investment strategy that focuses on fast growing companies with less emphasis on valuations.

The Value vs. Growth debate seems to have become the topic du jour so we’ve been looking at it in different ways. During the 12 month period ending May 2020, the Russell 1000® Value Index was down 1.7% while the Russell 1000® Growth Index was up 26.3%, a difference of nearly 30%. That brings the 5-year annualized returns to 4.4% and 14.5%, respectively. It is tough to make a conclusion from the data below, but it may tell you that there is likely to be at least a short-term pop in Value but that you may not want to make a big bet either way. For most people, having exposure to both is important right now. We found the following stats to be interesting:

  1. Does Value Beat Growth Over the Long Term? Not Necessarily, but What Works One Decade Usually Doesn’t the Next
    A common belief among investors has been that Value beats Growth over time. However, since 1979, the Russell 1000 Value Index had an 11.4% annualized return, while the Russell 1000 Growth Index returned 11.7%. That time period includes 2 dominant periods for Value (the 1980’s and the period 2000-2007) and 2 dominant periods for Growth (the 1990s and the last 10 years). Over the past 10 years through April, Russell 1000 Growth was up 14.4% and Russell 2000® Value was up 5.3%, a difference of 9.1%. So a decade ago, Value appeared to have significantly outperformed over time, prior to the recent dominance of Growth stocks.
*Best minus worst performer in the table. Source: Morningstar Direct
  1. Sector Weightings Have Become Starkly Different as Tech has Dominated Energy and Financials
    Value is cyclical and defensive, which could certainly offset each other in difficult markets, while Growth consists mainly of Technology, Healthcare, Consumer Discretionary, and Communications.
1As of May 31, 2020. Source: Morningstar Direct
  1. Sector Returns Say It All
    Within Value, defensive Utilities and Healthcare stocks have held up pretty well, but Financials, Materials, and Energy have been laggards for a while.
2As of May 31, 2020. Source: Morningstar Direct
  1. But Within Sectors You See a Major Difference Between “New” and “Old”
    The following two charts show the top 3 holdings in each sector for Value and Growth. Aside from the obvious differences in sector weightings, there are some dramatically different holdings among sectors, particularly in Communications Services, Consumer Discretionary, Real Estate, and Industrials; it is truly a new economy versus old economy story within each sector and in most industries.
3Weightings as of May 31, 2020 – Source: Morningstar Direct
  1. Top 10 is Fairly Concentrated Compared to History
    In 1980, 7 of the top 10 holdings of the S&P 500 Index were energy stocks, but by 1990 it was only 2. Today the top 10 stocks make up 25.1% of the S&P 500 Index, which is more than any of the prior periods shown here back to 1980. The top 5 holdings make up 20%, which is significantly more than the usual 12% +/- in years past.
Table: Ben Carlson | Source: S&P DOW JONES INDICES
  1. Leadership Can Continue for a Long Time
    This shows the largest stock holding each year back to 1965. Eventually each of the previous top companies went way out of favor but for most of them it took a pretty long time. Microsoft today is the largest top holding in the Index since the early 80’s but just took the top spot. FAANG** stocks have held the top spot since 2012.
Source: S&P, Dow Jones, Bloomberg. ©2020 Bianco Research, L.L.C. All Rights Reserved. https://www.biancoresearch.com/
**U.S. tech giants Facebook, Amazon, Apple, Netflix and Google parent Alphabet are known as the “FAANG” stocks.

IMPORTANT DISCLOSURES
Index Definitions – The S&P 500 Index is comprised of 500 U.S. stocks and is an indicator of the performance of the overall U.S. stock market. Standard & Poor’s Financial Services LLC, a division of S&P Global, is the source and owner of the registered trademarks related to the S&P 500 Index. The iShares Russell 1000 Value ETF seeks to track the investment results of an index composed of large- and mid-capitalization U.S. equities that exhibit value characteristics. The Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Russell 1000 Value Index. The iShares Russell 2000 Growth ETF seeks to track the investment results of an index composed of small-capitalization U.S. equities that exhibit growth characteristics. Due to licensing restrictions, the iShares Russell 1000 Value ETF is used as a proxy for the Russell 1000 Value Index and the iShares Russell 2000 Growth ETF is used as a proxy for the Russell 2000 Growth Index. Weightings and returns in the ETF may slightly differ from the actual index. The Russell 1000® Value Index measures the performance of the Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 1000® Growth Index measures the performance of the Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 2000® Index measures the performance of the 2000 smallest companies in the Russell 3000® Index. The Russell Top 200® Index is a market capitalization weighted index of the largest 2000 companies in the Russell 3000®. London Stock Exchange Group PLC and its group undertakings (collectively, the “LSE Group”). © LSE Group 2020. FTSE Russell is a trading name of certain LSE Group companies. “Russell®” is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or
data vest in relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote/sponsor/endorse the content of this communication.

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Past performance is not indicative of future results. Diversification and asset allocation does not ensure a profit or guarantee protection against a loss. There is no guarantee that a company will continue to pay dividends. The statements and opinions expressed in this article are those of Davenport Asset Management as of the date of the article, are subject to rapid change as economic and market conditions dictate, and do not necessarily represent the views of Davenport & Company LLC. This article does not constitute investment advice, is not predictive of future performance, and should not be construed as an offer to sell or a solicitation to buy any security or make an offer where otherwise unlawful. Investing in securities carries risk including the possible loss of principal. Individual circumstances vary.