I thought it would be interesting to add a twist to the old value vs growth debate by adding an index. So which investing objective do you think will win the grand value vs growth vs index debate? There may be a few surprises but you can first check out the figures for yourself in this chart.
To be fair, I looked at several time periods, including 3-year, 5-year, 10-year and 15-year, for total annualized returns. I then broke the chart into sections of capitalization--Large-cap, Mid-cap and Small-cap stocks. The respective highest return for each time period and each section is in bold font. For example, the "winner" for large-cap stock section, 3-year return column, is index (S&P 500).
Key Takeaways and Interesting Points From Chart:
- As expected, growth beats value among large-cap stocks in the 3-year period. This is not surprising because growth typically out-performs value in bull markets, particularly the latter stages.
- However, I find it interesting that the S&P 500 index beats growth and value for the 3-year return.
- Also as expected, index does not win any of the time periods analyzed in the small-cap category but value wins 3 of 4 time periods. This is most likely due to the fact that small-cap fund managers can add value by finding stocks that the majority of other investors may not be able to find. This speaks to the weak form of efficient markets hypothesis (EMH), which suggests that fundamental analysis of securities can provide an investor with information to produce returns above market averages in the short term.
- Perhaps the most significant note for the 5-year column is that value loses by a wide margin amongst large-cap stock funds. This is probably due to the fact that financial stocks are often large holdings in large value stock funds and the financial sector was the hardest hit during the credit crisis of 2008 (4 to 5 years ago).
- In the 10-year column, index wins large-cap (S&P 500) and mid-cap (S&P Midcap 400) but value wins the small-cap section.
- Int he 15-year period, which goes all the way back to 1997, growth wins large-cap. This is likely due to the dominance of growth stocks in the latter stages of the dot-com bubble of the late 1990's and into the early 2000's.
- As I noted in last week's post, the S&P Midcap 400 Index dominates value and growth in the mid-cap section but also dominates large-cap and small-cap stocks during the 15-year period.
Value vs Growth vs Index Investing: Winners and Losers
In summary, there is no clear winner for large-cap stocks during this 15-year period because large growth and the S&P 500 trade off leadership from period to period. However, large value is clearly the loser amongst large-cap stocks. Again, index wins in the mid-cap section but value wins 3 of 4 time periods in the small-cap section. This indicates no overall undisputed winner across all capitalization sizes.
My opinion with regard to "the best" investing objective or strategy is that it is entirely a subjective matter. For example, if you enjoy the research and analysis process and want to try to "beat the market" by some degree of market timing, you may gravitate toward actively-managed funds and use a combination of value and growth. However, if you do not enjoy research and analysis and your idea of winning is "not losing," index investing is for you.
In different words, the only "loser" is the one who blindly invests in a way that is not appropriate for his or her personal goals and risk tolerance. You may also try a combination of active and passive investing by creating a Core and Satellite portfolio, with an S&P Index fund as the "core" and actively-managed funds as the "satellites."
Before deciding upon a winner or loser for yourself, there are other factors to consider, such as expense ratio and holding period. For example, funds with lower costs tend to perform better than their peers with higher costs, especially in the large-cap and mid-cap categories. This would logically point to the use of index funds in these areas but perhaps using actively-manged funds, especially value, for small-cap stocks. Also, growth often does best in the latter stages of bull markets where the economy is growing but value often leads during recession.
For an in-depth analysis of on a year-by-year basis check my full-length article on value vs growth vs index investing.