Style Timing: Value vs. Growth
January 1, 2000
Topics - Factor/Style Investing Value Factor Timing
A large body of academic and industry research supports the efficacy of value strategies for choosing individual stocks. Value strategies are far from riskless, however. They can have long periods of poor performance.
Researchers have tried to improve on value strategies by incorporating various macroeconomic measures, including earnings yield on the S&P 500, the slope of the yield curve, corporate credit spreads and corporate profits. These “style timing” models have produced mixed results.
In this paper, we take a different approach. We have built a model that considers two simple factors: 1) the spread in valuation multiples between a value portfolio and a growth portfolio (the value spread), and 2) the spread in expected earnings growth between a growth portfolio and a value portfolio (the earnings growth spread). We find that the greater the value spread and the smaller the earnings growth spread, the better the forecast for value versus growth going forward. Our model currently forecasts near-historic highs in the expected one-year return of value stocks versus growth stocks. These results are statistically and economically strong.
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This material is not research and should not be treated as research. This paper does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of AQR. The views expressed reflect the current views as of the date hereof and neither the author nor AQR undertakes to advise you of any changes in the views expressed herein.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative purposes only. The information in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, neither AQR nor the author guarantees the accuracy, adequacy or completeness of such information. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such.
The information in this paper may contain projections or other forward-looking statements regarding future events, targets, forecasts or expectations regarding the strategies described herein, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different from that shown here. The information in this document, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.