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Person, Human, Monitor
Person, Human, Monitor

Can Value and Growth Coexist?

Kelvin Lee, Senior Investment Advisor

Can Value and Growth Coexist?

Since the onset of the Great Pandemic Crisis, global central banks and governments have initiated massive stimulus packages to hasten economic recovery. With the massive stimulus-led liquidity and speedy vaccines development, several developed nations were able to re-open within months after the initial outbreak.

The liquidity deluge by the Fed’s stimulus packages has been the main propellent for equity markets. The chart below distinctly evidenced the correlation between Fed’s balance sheet and the S&P 500 Index.

As the Fed approaches a decision point regarding its accommodative stance, a debate on Value or Growth investing is brewing amongst investors. Perhaps I should provide context on Growth and Value stocks before I proceed. According to Morgan Stanley Capital International’s (MSCI) definition:

By and large, the 2 groups of equities behave differently in certain economic conditions:

The constant evolution of these conditions has led to a “battle” between Growth and Value equities as they continuously vie for leadership till date. In a span of 12 months, from Aug 2020 to Jul 2021, Growth and Value equities have traded monthly leadership 7 times! (Refer to chart below)

Plot, Text, Plan

As we march into the mid-cycle period of a somewhat relatively slower but sustainable economic growth, the once definite distinction between Growth and Value is beginning to blur as both S&P500 Growth Index (SGX) and S&P500 Value Index (SVX) hovers at their all-time highs. Instead of being torn between Growth or Value equities, perhaps we could marry both their aspects.

Finding Value in Growth

Facebook (FB), a Growth stock, is a member in the S&P 500 Growth Index (SGX).

With a low price-earnings (P/E) ratio, Facebook (FB) is relatively cheap. The P/E ratio is used to determine if companies are over or undervalued. For example, company A, with a P/E ratio of 10 implies that investors are paying $10 for every dollar A earned. B, on the other hand, has a P/E ratio of 20. For investors, paying lower ($10) would be the sound decision. Facebook (FB) has a 12-month trailing and 12-month forward P/E ratio of *26.7 and *24.7 while S&P 500 Growth Index (SGX) numbers are *34.4 and *28.1 respectively, implying that the former is relatively undervalued.

Facebook (FB) is also relatively cheap from a price-book (P/B) ratio perspective. The P/B ratio serves the same valuation purpose. Employing the example above, company A with a P/B ratio of 10 implies that investors are paying $10 for every dollar of the company’s asset, while B, has a P/B ratio of 15. Intuitively, paying $10 makes more economic sense. Facebook (FB) has 12-month trailing and 12-month forward P/B ratio of *7.2 and *6.9 while S&P 500 Growth Index (SGX) numbers are *10.9 and *10.0 respectively, implying that the former is relatively undervalued.

The chart below shows how Facebook (FB), an undervalued Growth stock, has outperformed both S&P500 Growth Index (SGX) and S&P500 Value Index (SVX) since the post-COVID recovery.

Scoreboard, Oscilloscope, Electronics

Finding Growth in Value

Eli Lily & Co. (LLY), a Value stock, is a member in the S&P 500 Value Index (SVX).

Comparing the 12-month forward earnings-before-interest-tax-depreciation-amortisation (EBITDA) growth rate, Eli Lily & Co. (LLY) beats S&P 500 Value Index (SVX) with *33.5% p.a. versus *26.5% p.a. Earnings growth rate is a measure of a company’s earning capability. Investor would favour the company with a higher earning potential.

The chart below shows that Eli Lily & Co. (LLY), a Value stock with a relatively higher growth potential, has beaten both S&P500 Growth Index (SGX) and S&P500 Value Index (SVX) since the post-COVID recovery.

Plot, Scoreboard, Text

Make love, not war

The instances above demonstrate that Value and Growth can indeed coexist with each other instead of being at the opposite end of the spectrum. One feasible method for investors to embrace and integrate both aspects into their portfolio would be to invest with a mutual fund manager with an investment philosophy that embraces both aspects of Growth and Value, letting him/her perform the security selection for you!

One such fund is the United Global Quality Growth Fund, which seeks 4 enduring attributes (see table below) when investing in companies, including growth and valuation. To give credit, the above stocks which I mentioned earlier, Facebook Inc (FB) and Eli Lily & Co. (LLY), are two of the fund’s top ten holdings.

In addition, “Quality”, an attribute essential for differentiation amid current rich equity valuations, is considered as well. “Quality”, as defined by Wellington Management, are traits displayed by company with:

Text, Number, Symbol

Rather than being caught in the on-going “battle” between Growth and Value, why not marry both aspects and take the middle road to victory? Make love, not war!

  

Profile:
Kelvin has been an advisor for both retail and institutional portfolios before working as an Investment Advisor in StanChart. Off work, Kelvin enjoys culinary movies such as “Chef” and “Julie & Julia” where the neurotic, painstaking but satisfying process of creating something refined and balanced happens with unassuming ingredients. Kelvin practices mindfulness during midnight jogs sans music to absorb every sensory input. He appreciates quality time with friends and family over a game of darts, and starts each day, rain or shine, with a cup of iced Americano.

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