I have spent a lot of time on the soccer field. A soccer player from Kansas fully understands the impact of the wind’s direction. I was a goalkeeper — tailwinds or headwinds were tough — but for me, the crosswinds were the worst. Suddenly, I didn’t have to worry just about forces changing the ball’s speed; I had to keep in mind forces changing the ball’s direction in ways that were difficult to predict.
In my last blog for ThirtyNorth Investments, I talked about the headwinds for the Growth segment of the market and the tailwinds for the Value segment. I hear a lot of chatter about taking large bets based on those winds, and while I do believe in those fundamentals, I’d propose that we are currently in a crosswind situation.
Values stocks typically have lower prices compared to their earnings, intrinsic value and/or their industry peers. They tend to pay a dividend. The Value theory is that an investor purchases these companies while they are trading below what they are probably worth and holds them as they accelerate toward what they are hopefully actually worth.
Growth stocks are typically more expensive when compared to their current earnings. Investors are willing to pay more than a firm is currently worth for the future potential value. Growth companies are aggressively reinvesting and rarely pay dividends. Growth has been largely in favor over the past 10 years as technology has driven explosive expansion.
Asking if your investment firm has a “Value” or “Growth” bias would be one of the top 3 questions to ask your advisor. It’s of significant importance.
Over the last 20 years, Value and Growth have both seen their day. Value more consistently outperformed Growth prior to the financial crisis in 2007/2008, while Growth has been more consistent since then. Value investors believe that the winds have shifted back in their direction, after a long and very significant drought.
At our firm, we are Growth vs. Value agnostic. We believe in a diversified portfolio, but we will tilt allocations when we have a strong conviction that a specific segment of the market has a long-term advantage. This is where the crosswinds analogy comes in. We see the fundamental headwinds and tailwinds, but shifting inflation expectations are such a crosswind that it’s difficult to navigate toward the goal.
For example, when inflation expectations were higher at the beginning of the year, Value outperformed Growth. In late spring and most of the summer, expectations shifted to transitory inflation, 10-year treasury rates dropped again, and Growth outperformed. Recent data and the Fed’s comments had interest rate expectations on the rise again, and Value again outperformed. By the time this is published, the expectations may have shifted again.
To illustrate this point, let’s look at the attached chart. It displays the return difference of the Russell 1000 Value Index, an index of the largest U.S. Value stocks, against the Russell 1000 Growth Index, an index of the largest U.S. Growth stocks. Starting at the left, each column steps back one month. All columns end as of Sept. 30, 2021.
If you had moved assets out of this growth index and into this value index in October of 2020, as of last month’s end those assets would have done better by over 7%. On the other hand, had you made the same move in June of 2021, as of last month’s end those assets would have done over 9% worse because of the change. The move was logical, but the crosswinds moved against you.
Yes, Growth headwinds and Value tailwinds are important; but, as my soccer days taught me, if you aren’t prepared for the unpredictability of the crosswinds, you may miss the very thing you are trying to defend against.
Sarah Bomhoff is the Investment Strategist at ThirtyNorth Investments where “Bringing Together Money and Meaning” is their mission.
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