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A More Efficient Outlook
After years of debate concerning whether a growth or value investment style
provides the highest long-term return, many investors have concluded they can
strive for the best-possible returns while managing risk by combining growth
and value investing. This approach allows investors to potentially gain
throughout economic cycles in which the general market situation favors either
the growth or value investment style.
For example, value stocks, often stocks of cyclical industries, tend to do well
early in an economic recovery. Growth stocks, on the other hand, tend to lead
bull markets, which are normally fueled by falling interest rates and increased
company earnings. As seen in the table below, because the two groups of stocks
do not tend to move in the same direction or to the same extent, investors can
enhance return potential and reduce risk by combining the two approaches.
Value Investing
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Companies that have fallen out of favor, but still have good fundamentals
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Currently priced below average historical levels or current levels in industry
group
Growth Investing
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Better-than-average earnings gains in recent years
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Potential for sustainable earnings growth
The Style Cycle: An Unpredictable Pattern
| 1995 |
1996 |
1997 |
1998 |
1999 |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
Value
38.4% |
Growth
23.1% |
Value
35.2% |
Growth
38.7% |
Growth
33.2% |
Value
7.0% |
Value
(5.6)% |
Value
(15.5)% |
Value
30.0% |
Value
16.5% |
Value
7.1% |
Value
22.3% |
Growth
11.8% |
Growth
37.2% |
Value
21.6% |
Growth
30.5% |
Value
15.6% |
Value
7.4% |
Growth
(22.4)% |
Growth
(20.4)% |
Growth
(27.9)% |
Growth
29.7% |
Growth
6.3% |
Growth
5.3% |
Growth
9.1% |
Value
(0.2)% |
Russell 1000® Growth Index (Large-Cap Growth) measures the performance of
those Russell 1000* companies with higher price-to-book ratios and higher
forecasted growth values.
Russell 1000® Value Index (Large-Cap Value) measures the performance of
those Russell 1000* companies with lower price-to-book ratios and lower
forecasted growth values.
*Russell 1000® Index The Russell 1000 Index contains the 1000 largest
securities in the Russell 3000 Index, which represents approximately 98% of the
investable U.S. equity market. The index measures the performance of the
large-capitalization growth and value sectors of the U.S. equity market.
Approximately 50% of the Russell 1000 Index contains growth stocks, while the
other 50% is comprised of value stocks. Performance reflects the reinvestment
of dividends and other earnings.
Sources: Bloomberg Financial Markets, Frank Russell Company.
The growth and value returns reflected in the chart above are based on the
performance of the Russell 1000 Value Index and the Russell 1000 Growth Index.
Performance of all cited indices is calculated on a total return basis and
includes dividend reinvestment. Indices are not available for direct
investment. Past performance is not indicative of future results. It is
important to remember that there are risks inherent in any investment and there
is no assurance that any asset class or index will provide positive performance
over time.
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