After fifteen years of striking growth dominance, the return of value style premia from deep hibernation underscores the strength and impact of market undercurrents. Indeed, the original Russell Style Indexes introduced in 1986 provide an elegant means to capture these tidal forces within the broader market. This segmentation along lines of growth and value involves only three intuitive data inputs - namely price to book, historical earnings growth and expected earnings growth - yet produces powerful results.
This analysis is the second in a four-part series breaking down the dynamics of growth and value cycles in market returns, the first of which examined the duration of the 9 style regimes since 1979. The core question this paper investigates centers on just how impactful these style trends have been historically - we examined the cycle longevity, but what is their magnitude? Are style differences mere ripples in the oceanic scale of market returns or are they seismic forces whose tremors reverberate market wide?
The motivating factor behind this question is that since 1979, Russell 1000 Growth and Value Style indices have produced eerily similar returns, differing by only 8.7% after 43 years. If over the long run both style strategies have delivered investors to approximately the same place, how large precisely are the fluctuations between growth and value - and more importantly, are the results material to investors? By examining performance data spanning 9 style regimes, we find style returns are highly significant with the magnitude of style trends approximately 40% larger, on average, than the expected market rate of return. This analysis explores the nuances of style return behavior, how this performance can be quantified, and most importantly, the practical implications for investors.
If you missed part 1 of the paper, which analyses how growth and value strategies can decompose market risks and inform evidence-based investment outcomes, you can view it here.
