Your investment health: Is value investing still an effective strategy?

If you’ve noticed a decline in the relative performance of your investment portfolio over the past few years, it’s not necessarily because of the punishing impact that COVID-19 has had on the global economy. 

This decrease in relative return might be attributed to your investment portfolio following a value-style investment strategy. This particular strategy has underperformed the broad markets in the medium-term. You may be wondering if this strategy is passé and just a drag on your investments. Should you ditch the “value” from your portfolio to pursue other, possibly more profitable investment strategies? Let’s examine the question and compare and contrast the two leading long-term investment strategies: value and growth.

There are distinct differences between value and growth. A value-style investment strategy focuses on investments that appear to be worth less than their true, realizable value. Value investments may also pay a regular dividend. In other words, investments selling at a lower relative price; hence the term “buying value” which is commonly associated with this strategy. 

On the other hand, a growth-style investment strategy focuses more on the future profits of the company, rather than the current situation. This strategy is less focused on regular dividends, as profits tend to be reinvested back into the company to help it “grow” its market share and earnings. In addition, the actual price of the growth investment tends to be higher on a relative basis. 

Here are the compound annual returns of the two strategies, compiled from U.S. stock markets, in Canadian dollars, as at June 30, 2021:

As you can see, growth has outperformed over five and 10 years. However, over the long-term, value has marginally beaten growth. There is no reliable way to predict when value investments will outperform growth and vice versa. I recommend including both investment styles in your portfolio, which can provide diversification. Have you ever heard the term: it’s better to be approximately right than precisely wrong? Well, this applies here in my opinion. You can ask your investment advisor for a breakdown of the value and growth exposure in your investment portfolio, and if you are weighted too far in one direction, you can then make the appropriate adjustments to balance things out.

Returns in financial markets are impossible to predict, but history supports an expectation of positive returns for both value and growth investment strategies over the long-term. For the best chance of capturing the benefits the financial markets can offer, diversify your investment portfolio with both the value and growth investment strategies.

Alan Acton is an Ottawa-based portfolio manager with Polaris Wealth, a division of Polaris Financial Inc. Conclusions and opinions in this article are his own and do not necessarily represent those of Polaris Financial Inc.