Ongoing conflict has rattled global markets. The S&P/ASX 200 Index (ASX: XJO) is now down 9% since the beginning of March.
With such volatility, investors may be reviewing their strategies to understand what can help provide relief in the current environment.
A new report from VanEck has shed light on the interesting pendulum of growth and value investing.
Over the long term, the relative returns of value and growth companies are negatively correlated. In other words, in the past, when value has outperformed, it probably has coincided with a period in which growth underperformed and vice versa.
According to MSCI, individual factors have been shown to outperform during different macroeconomic environments. Value is "pro-cyclical", meaning that this type of strategy historically outperforms during rising market conditions.
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What's the difference between growth and value investing?
There are many different strategies investors use to grow their wealth.
Two common strategies investors use are growth and value investing.
Growth investors focus on companies expected to deliver above-average earnings or revenue expansion, often prioritising future potential over current valuation metrics.
It is commonly associated with sectors where companies can scale quickly, innovate, and expand revenues at above-average rates.
The Technology sector is the classic example, like companies focussed on software, semiconductors, or artificial intelligence.
These businesses can grow rapidly with relatively low marginal costs.
The healthcare sector – especially biotech and pharmaceuticals – is also prominent, as breakthroughs can lead to explosive earnings growth.
In contrast, value investors seek stocks that appear undervalued relative to their intrinsic worth, often identified through low valuation multiples or temporarily depressed prices, with the belief that the market will eventually correct its mispricing.
While growth investing emphasises momentum, innovation, and scalability, value investing relies on patience, margin of safety, and mean reversion.
How to target these strategies with ASX ETFs
There are several ASX ETFs to consider for those targeting growth or value shares.
For growth, ETFs to consider include:
- Vanguard Diversified High Growth Index ETF (ASX: VDHG)
- ETFs Fang+ ETF (ASX: FANG)
- Munro Asset Management – Munro Global Growth Fund (ASX: MAET).
For value investing:
- Vanguard Global Value Equity Active ETF (Managed Fund) (ASX: VVLU)
- VanEck Msci International Value ETF (ASX: VLUE).
In terms of performance, these growth funds are down between 5% and 15% year to date.
While the value funds have perhaps weathered the storm slightly better, falling between 2% and 5%.
It's important to remember this small snapshot is not representative of long term opportunity.
However, according to VanEck, current conditions may favour a value focus.
In the past twelve months, however, changes in macroeconomic indicators potentially bode well for a value rotation, and inflation, being driven by supply shocks from the crisis in the Gulf, could propel value's recent relative outperformance further.
Inflationary expectations have risen sharply since the US-Iran conflict commenced. A higher inflation environment supports value company valuations, and we think the current upward pressure on long-dated bond yields is likely to remain if the market remains uncertain about growth and inflation. Value typically outperforms in such an environment.
