Investors have always seen the traditional definitions of ‘value’ and ‘growth’ as two separate investing styles that have alternately dominated the market. However, according to Goldman Sachs, the distinctions between the two are “becoming muddled” in the current financial climate. 

“Fama and French (Fama-French three-factor model) defined Value stocks as those equities that have high book-to-market-value ratios, and Growth stocks as those that have low book-to-market-value ratios,” writes Simona Gambarini, Senior Market Strategist, Strategic Advisory Solutions at Goldman Sachs. 

“The intuition is that Value stocks have low prices relative to their ‘intrinsic’ value, i.e., their book value, but are characterised by high dividend yields and are therefore perceived to be undervalued,” she adds. 

Elucidating on the two, Gambarini informs that value investing was the dominant investment style in the period from 1970 to early 2007. Subsequently, from the middle of 2007, growth investing took precedence and reached its peak during the height of the pandemic. Since then, value investing has been gaining popularity again. 

As per the asset manager, value investing becomes dominant when inflation and interest rates are high, coupled with a strong rate of economic growth. On the other hand, growth stocks perform well when faced with relatively weaker interest rates and inflation, along with comparatively low economic growth.

Furthermore, the asset manager believes that the line between growth and value investing is thinning as the nature of assets employed by businesses to generate revenue is shifting from the physical to the intangible. As examples, she cites the adoption of technology by various sectors and the shift to decarbonisation in enhancing growth opportunities. 

Due to these factors, Gambarini urges the need to go beyond traditional investing styles as the main driver of investing decisions. She also elaborates on the pros and cons of rotation in investing styles and opines that owning a full complement of growth and value stocks in strategic portfolios can be beneficial.

“Compartmentalising investments into traditional categories…may not be the optimal way to approach the investment opportunity set ahead…We think the companies contributing to alpha going forward will innovate, disrupt, enable, adapt, and be diverse across global markets,” the asset manager concludes.

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