The Battle Between Growth and Value
Before we kick off, I wanted to let you know that the latest issue of Regius Magazine features an article from Omega Point on “Improving Tax-Aware Performance Through Better Substitutions.” You can find us on p.74, and I encourage you to check out the rest of the excellent coverage, which focuses on Crypto, ESG, and Sustainability.
The last two times we highlighted the relationship between Growth and Value, we noted the heavy influences of Market Sensitivity, Volatility, and Interest Rate Beta in driving risks and performances of the two market segments. Since then, the DNA of these influential factors has evolved, tossing Growth and Value in different directions. To add to the chaos, the Momentum Rotation in March provided its own systematic shake-up, forcing investors to grapple with just how much exposure they’re willing to take on in Growth and Value factors.
To set the scene, let’s look at the YTD relative performance between the Growth and Value factors in the Axioma United States 4 Medium Horizon Risk Model.
The 2021 See-Saw of Growth and Value
Following 2020, a year in which we saw the Growth factor outperform Value by 9.75%, 2021 has been far less consistent or predictable. Growth experienced two steep falls relative to Value in Feb and May of 2021, leading to underperformance of 8.41% through May 17th, almost matching its outperformance from 2020 in a matter of just a few months. Since then, Growth has gotten the better of Value as it creeps back toward neutral ground for the year.
The Growth vs. Value Battle
As we know, there are a lot more characters in this story. To uncover what other factors are tugging at Growth and Value stocks, we created a portfolio of the leaders in each factor. The portfolios are daily-rebalanced, equal-weighted lists of stocks with factor exposures > 1 to Growth and Value, respectively. The inclusion universe consists of Russell 3000 stocks with Market Capitalization greater than $500 million and Average Daily Volume greater than $5 million.
We did not apply any sector adjustments for this week's analysis, so the portfolios were free to take on large concentrations based purely on the factor tilts of the underlying names. The resulting portfolios were consistently concentrated with Growth represented by Health Careand Information Technology and Value by Financials, Energy, and Real Estate.
Top 5 Sector Exposures
YTD Performance Comparison
Decomposing the relative performance between these two portfolios will give us better insight into the broader forces in the market and isolate changing trends throughout the year. Below, we show the performance of the US High Growth Portfolio vs. the US High Value Portfolio using the Axioma US4 Medium Horizon model. The overall relative performance largely mirrors the isolated factor trends we observed earlier, except that the US High Growth Portfolio doesn’t rebound to the same degree relative to its Value counterpart. For example, a nearly 40% relative drag through mid-May only climbs back to -25% by November 4th.
We notice significant contributions from the Volatility and Market Sensitivity factors when digging deeper into Value's hot streak and Growth's inability to claw back. Both factors drove the February move in Value's favor, while Volatility added May's additional and dramatic punch. Interestingly, the factors settled down significantly from the end of Q2 to date.
When shifting to the relative factor exposures, we start to see why. The US High Growth Portfolio's active exposure to Market Sensitivity did a complete 180 from the beginning of the year to the beginning of June relative to the US High Value Portfolio. Likewise, Volatility saw a downward movement around the same timeframe, albeit much smaller in terms of magnitude. These movements tell us that Growth stocks have exhibited higher beta and lower residual Volatility relative to Value stocks as the year has progressed. Because the most significant factor return moves occurred in the first half of the year, Growth was on the wrong side of both factors.
What about Macro?
We’ve previously established that macroeconomic factors have been very much involved in the Growth vs. Value story. To quantify the role of macro, we turned to the Axioma Worldwide Macro Projection Risk Model.
Of the 24.54% underperformance of the US High Growth Portfolio relative to the US High Value Portfolio, macro factors account for nearly half (-11.94%). The most pronounced factor, to no surprise, was US Term Spread which measures the spread between the US 10-year and 6-month Treasury yields. The US Term Spread detracted 489 bps of relative performance, 550 bps of which came between year-end and March 19th.
Q1, which saw the most significant rise in interest rates, coincided with the most extensive spread in exposure to the US Term Spread factor between the US High Growth and US High Value Portfolios. Because Value stocks were much more positively correlated to rates than Growth stocks, the Growth portfolio again held the short end of the stick.
The gap of relative exposure to interest rates between Growth and Value has been closing of late due to the exposure from Growth stocks increasing and the exposure of Value stocks decreasing, thus minimizing the role of interest rates in the Growth vs. Value narrative moving forward. That, along with the Fed’s statement that it doesn’t “think it’s a good time to raise interest rates” this week, could provide more opportunity for Growth to continue its rebounding path upward.
If you are interested in discussing the Growth and Value landscape or would like a complimentary review of your portfolio in the Omega Point platform, please get in touch with us.
US & Global Market Summary
US Market: 11/01/21 - 11/05/21
- All major equity benchmarks climbed to records, with the S&P 500 posting its fifth consecutive weekly rally -- the longest since August 2020.
- Pfizer (NYSE: PFE) shares surged as the vaccine maker released a study of its COVID-19 antiviral drug suggesting it is successful in combating the illness. The company is aiming to submit data from its experimental pill to U.S. regulators by the Nov. 25 Thanksgiving holiday.
- The U.S. labor market rebounded in October, with a larger-than-forecast and broad-based payrolls gain. The unemployment rate fell to 4.6%, while the labor-force participation rate was unchanged.
- The Federal Reserve committed to leave interest rates near zero and announced that later this month it will start scaling back its bond purchases begun in the wake of the pandemic.
- West Texas Intermediate crude rose 3.5% to $81.53 a barrel.
Normalized Factor Returns: Axioma US Equity Risk Model (AXUS4-MH)
- Profitability continued its strong run of late to finish atop this week’s US factor leaderboard.
- Medium-Term Momentum moved upward for a 2nd straight week following a 2-month decline.
- Earnings Yield crossed the mean into positive terrain as it moved upward for the 5th consecutive week.
- Growth leveled off its recent steep trajectory but moved upward to land at -0.01 SD from the mean.
- Size weakened after 3 positive weeks, but remains in the + column. For now.
- Value finished dead last for the 4th straight week, finally entering negative territory to sit at -0.31 SD below the mean.
Normalized Factor Returns: Axioma Worldwide Equity Risk Model (AXWW4-MH)
- Profitability leapt upward into positive terrain and repeated last week’s first place finish atop the global factor leaderboard.
- Earnings Yield saw another strong week as it moves closer to the mean.
- Momentum moved upward for the 2nd consecutive week following recent extended weakness.
- Growth regressed following several upward moves and slides back closer to Oversold status.
- Market Sensitivity (Beta) continued its trend of recent weakness moving further away from Overbought territory.
- Mirroring the US, Global Value finished in last place for the 4th straight week, firmly entering negative territory.