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Which is better, growth or value investing?

Which is better, growth or value investing?

The debate over these two investment approaches has been a longstanding fixture in the financial world.
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16 OCT, 2023

By Constanza Ramos


In the ever-evolving world of finance and investment, a perennial question continues to captivate the minds of investors and financial experts: "Which is the superior strategy – growth or value investing?" It's a question that transcends the confines of academia, resonating with both seasoned Wall Street veterans and novice retail investors.

The debate over these two investment approaches has been a longstanding fixture in the financial world, with proponents of each style staunchly defending their chosen path to financial success. Ben Williams from Arcus Japan Fund shares his vision with us in this article.

Which is better, growth or value investing?

Ben Williams, Arcus Japan Fund, Assistant Portfolio Manager

If we look at the data going back some 40-plus years, it is clear that value investing has significantly outperformed growth in the Japanese market

Of course, there are periods where growth may outperform value. During the recent era of low and negative interest rates, for example, cheap money enabled companies to borrow to grow their businesses, resulting in many growth stocks performing much more strongly than value stocks. 

However, as monetary easing came to an end and the dispersion between the valuations of growth stocks and value stocks reached extremely high levels – i.e., growth stocks were exceedingly expensive and value stocks were at extremely low valuations – we have seen over the last three years a return to the long-term trend of value stocks outperforming growth stocks

While the gap between cheap and expensive stocks has narrowed somewhat in recent years, there are still extremely high levels of dispersion with value stocks continuing to look very cheap in relation to growth stocks. Ultimately, value improvement has merely returned this ratio to early-2020 levels, meaning a near decade of expansion (2009-2020) has yet to be corrected. 

We are entering a period of rising interest rates and increasing signs of inflation. Paired with the fact that almost half of all Japanese stocks are still trading at less than 1 on a price-to-book ratio, we believe value investors are well set for the coming years

Over 40 years of data suggest the value style in Japan is generally superior to growth. If this trend remains, the recovery for Japanese value stocks has only just begun.

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