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Style Timing: Value versus Growth Is Value Dead?
Summary
A large body of both academic and industry research supports the long-term efficacy of value strategies for choosing individual stocks. However, value strategies are far from riskless. They can have long periods of poor performance. In an effort to improve upon these strategies, researchers have tried to forecast these returns with mixed results. Most of these “style timing” models are based on macroeconomic factors. We take a different approach considering 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 bigger the value spread and the smaller the earnings growth spread, the better our forecast for value versus growth going forward. These results are statistically and economically strong. Finally, our current (November 1999) predicted one-year return of value versus growth is near the highest in history.
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Style Timing: Value versus Growth Is Value Dead?
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