The 10-Year Growth Premium
One of the core elements of Gerstein Fisher’s investment approach is to seek out quantifiable risk factors across securities. The value premium – the phenomenon of companies with lower stock prices relative to their book values tending to outperform the rest of the market – is one of the best-documented and most consistent of these risk factors. In fact, when we compare the returns over the last 35 years between the value and growth halves of the market (see Exhibit 1), value stocks have earned significantly more for investors, across both large and small cap securities. The value premium has been observed not only in US markets, but also across dozens of countries in a number of academic studies.
With decades of history demonstrating such significant outperformance, is there any reason for investors to even bother owning growth stocks at all? At Gerstein Fisher, we’ve always built our portfolios to incorporate tilts towards value as a risk factor (along with multiple other factors), while still maintaining core exposure to the growth segment of the market. Over time, both value and growth have each had fairly long periods of underperformance. In fact, we have just completed a full decade where value lagged growth significantly (see Exhibit 2). Thus, allocating a portfolio 100% to value stocks is not going to be a consistently winning strategy.