Investment Insights
Growth and Value:
A Matter of Style
SUSAN HIRSCH, MANAGING DIRECTOR AND LEAD PORTFOLIO
MANAGER OF TIAA-CREF’s LARGE-CAP GROWTH
RICHARD CUTLER, MANAGING DIRECTOR AND PORTFOLIO
MANAGER OF TIAA-CREF’s LARGE-CAP VALUE FUND
ARTICLE HIGHLIGHTS
Large-cap growth investing focuses on the stocks of expanding businesses.
Large-cap value investing seeks out-of-favor stocks at low prices.
Large-cap growth and value stocks tend to perform differently at different
times.
As a result, holding both kinds of stocks may potentially increase a
portfolio’s total return and reduce its volatility.
Large-cap growth and value are two distinct – and complementary – approaches
to investing in the stock market. Large-cap growth investors look for stocks with
rising share prices and strong growth potential. In contrast, large-cap value
investors look for stocks at low prices relative to the company’s intrinsic long-term
value, which the investor believes has the potential to be unlocked. Many
individual investors blend these styles in the context of their asset allocation plan,
typically by owning a value fund and a growth fund in their overall portfolios. When
used in combination, large-cap growth and value investing can enhance a
portfolio’s overall diversification strategy, thus increasing total return potential and
reducing volatility.
Susan Hirsch, Lead Portfolio Manager of TIAA-CREF’s Large-Cap Growth Fund,
and Richard Cutler, Lead Portfolio Manager of TIAA-CREF’s Large-Cap Value
Fund, answer some questions about growth and value investing.
What are growth and value stocks?
Large-cap value stocks may have compelling intrinsic value and long-term
appreciation potential, but are temporarily out of favor or less well-known (i.e.,
“under the radar” of most Wall Street analysts), and may therefore be priced at a
discount. Large-cap value investors expect to profit over the long term as the
market gradually recognizes the company’s true worth and the stock price rises.
In addition, a large-cap value company often returns some of its profits to
shareholders in the form of dividends or stock buybacks. Large-cap value stocks
can be found in all industry sectors.
Growth and Value: A Matter of Style
In contrast, large-cap growth companies, which thrive on innovation and change,
can mature into market-leading, nationally recognized enterprises. Investors are
often willing to pay a premium for these high-quality companies because of their
exceptional growth potential. These companies generally reinvest cash flow from
operations into new growth initiatives in order to maintain above-average growth
rates; as a result, most do not pay large dividends. Instead, investors are rewarded
by the company’s growth if the initiatives are successful: New products or services
may support higher profits, which equate to higher share prices in the long term.
Although growth stocks can also be found in all industry sectors, the ones that
exhibit the most growth characteristics are those that rely on innovation and change
for growth, including technology, healthcare and consumer discretionary (which
includes retailers, media companies and apparel companies).
Why does it make sense to invest in both growth and value stocks?
Holding both large-cap growth and value stocks simultaneously increases a
portfolio’s overall diversification, thus increasing return potential and reducing
volatility. Historically, large-cap growth and large-cap value stocks have tended to
perform differently at different times, as illustrated by the Russell 1000 Growth and
Value indexes (see Exhibit 1).
Since 1995, for example, growth stocks have generally fared better when market
volatility has been low—as in 1999, during the boom in technology stocks. In that
year, large-cap growth stocks surged 33.16%, while large-cap value stocks rose just
7.35%. In contrast, when market volatility has been high, value stocks have
generally outperformed. For example, in 2000, after the tech bubble burst, large-cap
value stocks gained 7.01%, strongly outperforming large-cap growth stocks, which
declined 22.42%.
Exhibit 1
Growth and value stocks tend to perform differently at different times
*YTD 2012
Russell 1000 Growth
Index
Russell 1000 Value
Index
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012*
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
-10.00%
-20.00%
-30.00%
-40.00%
Annual Return of Russell 1000 Growth & Value Indices
[% Rate of Return]
(Past performance is no guarantee of future results.)
Growth and Value: A Matter of Style
During periods of extreme global market volatility—such as the financial crisis and
recession of 2008 and early 2009—large-cap growth and large-cap value stocks
may be more likely to rise and fall in tandem. In 2008, for example, the Russell 1000
Growth and Russell 100 Value Indexes posted similar returns of -38.44 and 36.85%, respectively.
What are some of the common myths or misperceptions about
growth and value investing?
One of the common myths or misperceptions about value investing is that stocks are
likely to be low-quality industrial companies. But in fact, there are many high-quality
value companies in sectors such as technology and biotech, which have simply
fallen out of favor for economic or cyclical reasons. This gives us the opportunity to
buy world-class, blue-chip companies at very reasonable prices.
There are also common misperceptions about investing in growth stocks—for
example, that large-cap growth stocks always grow. In fact, even high-quality growth
companies can go through growing pains if a new product or service does not do as
well as planned or if the company misses a new product introduction. When that
happens, growth expectations disappoint and growth companies may lose their
premium value. This may be a good time for investors to get interested. Of course,
there is no guarantee that any company will rebound or continue to grow.
How has the globalization of economies and markets affected
growth and value investing?
As a result of such globalization, it has become apparent that certain global sectors
such as oil and gas move in correlation through stock market fluctuations. As we
evaluate companies in the value space, this affords us the opportunity to buy fastgrowing, high-quality companies at a discount prices when all of the companies in a
particular sector are under pressure at the same time.
For growth stocks, the globalization of economies and markets has created
opportunity in two ways. First, U.S. companies have been able to capitalize on
opportunities overseas: As domestic unemployment numbers remain high and
consumers curtail their spending habits, U.S. companies have made the burgeoning
middle classes in emerging markets such as India and China a critical part of their
strategies, building their brands and franchises overseas in search of greater profits.
Second, overseas growth stocks offer a critical source of diversification in growth
portfolios, allowing investors to capitalize on growth trends in a wide variety of
markets.
Is there any overlap of companies in large-cap growth and largecap value investing?
In depressed economic cycles, it is common for the same stocks to meet the criteria
of both our growth and value funds, and in the current economic climate, there is
more overlap than ever before between companies that we invest in for the largecap growth and value portfolios. For example, the large-cap value portfolio invests in
some of the same companies held in the large-cap growth portfolio because a
particular company may have had some recent adverse news that brought down its
share price and it is now perceived to be undervalued. Exhibit 2 shows the number
Growth and Value: A Matter of Style
of holdings and duplicate companies in the Russell 1000 large-cap growth and
Russell 1000 large-cap value indices from December 2004 to June 2012.
Exhibit 2
In the current climate, there is more overlap between growth and value portfolios
Russell 1000 Growth & Value Indices
[Number of Holdings and Duplicate Companies]
800
Number of Holdings
700
Russell 1000 Growth
Holdings
600
500
400
Russell 1000 Value
Holdings
300
Duplicate Companies
200
100
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
0
Are there any issues that could have an impact on large-cap
growth or value stocks?
In the value space, we need to look at stocks’ current valuations and consider
whether they will achieve their earnings potential. This can be tricky in the near term.
But over the longer term, we are willing to deal with short-term pain to find
companies that are “cheap” based on normalized earnings, which are averaged over
a cycle.
Meanwhile, in the growth space, a lot of large-cap growth stocks with high price
multiples are feeling the pinch of slower growth. Investors usually pay a premium for
these stocks with the expectation that growth will continue. In today’s slow growth
environment, however, investors are not willing to pay a high premium because the
economic climate is too risky. The impact on growth stocks is that there is a shift to
mega caps stocks with market caps of over $100 billion, where investors anticipate
more modest growth, and secular stocks, in which investors are confident that
growth will be sustained. In addition, growth portfolios will focus on companies with
greater U.S. exposure so that European woes will not be as painful and government
policy in China and elsewhere will have a less pronounced impact.
What are the short-term and long-term outlooks for large-cap
growth and value stocks?
In the large-cap value space, there is a huge disparity right now between safer
yielding stocks and riskier lower-valuation stocks. For example, the price valuations
of lower-risk utility stocks are very expensive, while higher-risk financial stocks have
lower price valuations. In essence, it’s really a balancing act between risk and
Growth and Value: A Matter of Style
earnings visibility. There are a lot of opportunities in the short term because there
are many inexpensively priced stocks. Over the long term, we believe that accurate
price valuations hold the key to generating better returns than the benchmark.
For large-cap growth stocks, the ideal environment is a moderately expanding
economy and subdued interest rates. In that environment, the competitive landscape
for returns comparable to what growth stocks can provide is limited. Thus, an
investment in a company hypothetically growing at 15%-20% can provide an overall
return to investors of a similar amount—assuming nothing else changes. That
represents a reasonable return on investment for a high-quality business, particularly
if inflation and interest rates are modest. However, we are not currently in an ideal
environment. The reality is that the short-term global economic environment is filled
with a lot of uncertainty because of many issues, including intensifying concerns
about automatic spending cuts and tax increases (the so-called “fiscal cliff”) that will
take effect unless a political compromise is reached, slower growth in China and the
European sovereign debt crisis. But despite the short-term challenges, the long-term
outlook looks bright because there are many strong franchises in the space that
make for great long-term investments.
Growth and Value: A Matter of Style
Please note that equity investing involves risk.
Past performance does not guarantee future results.
Consider the investment objectives, risks, charges and expenses before investing. Please call 877 518-9161 or go to
TIAA-CREF.org for a prospectus that contains this and other information. Read the prospectus carefully before
investing.
Please note the risks associated with foreign investments are often magnified in emerging markets where there is greater potential for political,
currency, and economic volatility.
Diversification is a technique to help reduce risk. There is no absolute guarantee that diversification will protect against a loss of income.
It is not possible to invest in an index. Performance for indices does not reflect investment fees or transaction costs.
These views may change in response to changing economic and market conditions. The material is for informational purposes onl y and should not
be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate.
Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not deposits, are not insured b y any federal
government agency, are not a condition to any banking service or activity, and may lose value.
TIAA-CREF Asset Management provides investment advice and portfolio management services to the TIAA-CREF group of companies through the
following entities: Teachers Advisors, Inc., TIAA-CREF Investment Management, LLC and Teachers Insurance and Annuity Association® (TIAA®).
Teachers Advisors, Inc. is a registered investment advisor and wholly owned subsidiary of Teachers Insurance and Annuity Association (TIAA).
TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products.
© 2012 Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF), New York, NY 10017.
C6620