Which way now, growth or value?
David Prosser on which style of investment will triumph next year and beyond.
Many investors will know that so-called “growth investing” has fallen out of favour in recent years, with “value investing” supplanting it with superior performance. But what you may not realise is just how significant the turnaround has been.
Analysis published recently by Redwheel, the asset manager, reveals the remarkable extent to which growth investment styles have outstripped value alternatives.
Since November 2020, the MSCI UK Value Index has delivered a total return of 93%, while the MSCI UK Growth Index has managed just 48%. Similar gaps have developed in Europe and Japan, with only the US still seeing growth stocks outperform (and then only amongst large companies, where the contribution of a handful of tech giants makes all the difference). Compare that to the 2010s, when growth investment styles delivered outsized returns.
The question now is where we go from here. Remember, growth investors tend to worry less about the current price of shares relative to their fundamentals. They are more interested in the potential for significant growth in revenues and earnings.
It is the outperformance of growth stocks in the 2010s that is the anomaly; value styles have done better in every other decade over the past 100 years.
Redwheel
By contrast, value investors like shares priced at a level that does not appear to fully reflect their true worth. So which style is set to prosper in 2025 and beyond?
It does feel as if we stand at a significant moment right now – and not just because 2024 is drawing to a close.
First, we’ve just seen a new President elected in the US – and whatever you think of Donald Trump, there is no denying he has a very different world view to the current administration. And second, we end the year with a different global economy to the one with which 2024 began; inflation is under control and interest rates in Western economies are falling.
Historically, Redwheel’s analysis argues, it is the outperformance of growth stocks in the 2010s that is the anomaly; value styles have done better in every other decade over the past 100 years.
However, there’s nothing automatic about the success of value stocks. Rather, research suggests that value stocks do better during periods of higher interest rates, with growth stocks stronger when rates are lower. This is because when rates are low, it’s easier to justify higher growth stock valuations based on their earnings in the future.
But as rates move higher, the immediate return on offer from value stocks, often in the form of dividend payments, looks more attractive.
Intriguingly, moreover, there is quite a body of research that suggests 4% is the magic number for interest rates and growth stocks. When rates drop below 4%, growth stocks often start to do better. Therefore, the fact that value stocks have frequently outperformed may simply reflect the reality that rates have rarely remained below 4% for long. They did in the 2010s though, which is when growth stocks did so much better.
Consider where we are today. The US Federal Reserve’s “fed funds” rate now stands in the 4.5-4.75% range, but the Fed expects a series of reductions over the next year or so. In the UK, meanwhile, the Bank of England recently cut interest rates for the second time this year, to 4.75%; and it is also expected to continue reducing rates during 2025.
It's important food for thought – and there’s one more salient point to throw in –. the election of Donald Trump could delay interest rate reductions. His plans for tariff increases and tax cuts are expected to have an inflationary impact, which may make it more difficult for the Fed to cut rates as aggressively as previously anticipated.
Where does this leave us? The short answer is that we face uncertainty. However, there are reasons to think growth investment may now be due a comeback. In which case, the high-profile growth investors that run some of the UK’s best-known investment trusts may be about to see their fortunes improve.
Most notably, Baillie Gifford, the asset manager behind funds such as Scottish Mortgage, has been a long-term growth afficionado. That approach saw it deliver stellar returns on its funds until the market shifted in 2020; since then, its performance has been (to be charitable) somewhat indifferent.
In fact, Scottish Mortgage has been climbing fast in recent months – delivering share price gains of almost 17% since the end of the summer. Is that a sign of a renaissance for growth investment?
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