Ariel Investments commentary for the month ended November 30, 2015.
If you do not watch the market intently, you may be surprised at the performance gap between value and growth stocks the past few years. The table below shows standard return periods for the growth and value versions of the broadest indexes we track: the developed markets large-cap MSCI EAFE Index, the U.S. large-cap Russell 1000 Index and the U.S. small-cap Russell 2000 Index.
As you can see, each growth index has outperformed each value index over every one of these four time periods. In the multi-year periods, the gap averages more than 2.5% annually—a huge margin in investing.
Ariel Investments: Growth outperforming value
We looked at domestic indexes over (rolling) ten-year periods for the past 25 years. Since 1990, growth has outperformed value during only two long periods: from early 1995 through early 2001 and from spring 2012 up until now. In the first stretch, growth trumped value in large caps for six years, but for just half a year in small caps. Recently, small growth has topped small value for a longer duration. The Russell 2000 Growth Index’s 10-year returns have beaten the Value Index’s for 43 straight months. In large caps, growth topped value for 8 months in 2012 and the last 24 months.
We think the recent periods when growth dominated are quite different. The late 1990s were a period of significant growth, whereby many investors projected high growth far into the future and became enchanted with these forecasts. By contrast, since the end of the Financial Crisis, low growth and low interest rates have been a global phenomenon. This environment has created twin demands. Investors’ “search for yield,” has boosted the returns of high-yield bonds and dividend-heavy stocks. Similarly, because many companies are seeing anemic growth, investors have piled into the few consistent growers.
As patient value investors, we waited out the last growth era. At the time, of course, we had no idea when it would end, but we expected normalcy would return. And it did. Once again, we are continuing to invest rationally and with our eyes on the long term—with the expectation that balance will return sooner rather than later.