The Momentum Ball Remains in Growth’s Court

In his Streetwise column on November 28, James Mackintosh of The Wall Street Journal looked at the divergence between the valuations of Growth stocks and Value stocks, as the Russell 1000 Growth index has outperformed its Value counterpart by 19% year to date. Since he focused on valuation levels and the relative prospects for the two groups of stocks, we steered our analysis toward risk and relative performance attribution.

Index Risks. According to our medium-horizon fundamental model, Value started the year with higher volatility than Growth, but that relative position switched right at the time FTSE Russell rebalanced the indices. The relative risk rose steadily from that point until mid-September, when it more or less leveled off, ending our test period with Growth’s risk about 8% higher than Value’s (total risk for both has since fallen, of course, along with that of the market). The ratio of risk is high relative to where it started this year, and a bit higher than the long-term median of Growth’s risk, which is about 5% higher than Value’s. However, the relative risk remains well below the levels reached at the height of the Internet bubble, when Growth’s volatility was more than 80% higher than that of Value. Leading up to the Internet bust, the ratio was mostly above 1.4. To us, the current relative level of risk does not set off alarm bells signaling Growth is far riskier than Value.

Total Risk and Ratio of Total Risks, Russell 1000 Growth and Russell 1000 Value

Performance Attribution. Many market participants view the performance differential this year as driven by the strength of a number of the Internet-related FAANG stocks, but attribution analysis reveals that the two biggest industry drivers of the relative performance are Growth’s underweight in Oil, Gas and Consumable Fuels (with a 2.2% contribution) and its underweight in Banks (1.7% contribution). The overweight in Internet Software and Services falls into third place in terms of contribution at 1.1%. Only Growth’s overweight in Specialty Retail produced a big drag on relative performance, subtracting almost 50 basis points. As for Style factors, both Medium-Term Momentum and Growth have fared well this year, and the Growth index was overweight both relative to Value. In total, about 1/3 of the return differential between Value and Growth was stock specific, with 20% the result of style tilts and almost half from industry bets; all were in Growth’s favor.

Momentum of Growth and Value. Mackintosh’s column concluded with a discussion of “the momentum of value,” suggesting that a turn in the direction of momentum could provide an early buy (or warning) signal. We calculated the Medium-Term Momentum exposure relative to the Russell 1000 of the Growth and Value indices. Based on current readings, it does not appear that now is the time to switch. The Momentum exposure of the Growth index, which ticked up sharply at the rebalance in June and has continued to rise since then, has accelerated of late (as of November 27), while the Value index has done the opposite.

Medium-Term Momentum Exposure

Melissa Brown, CFA

As Managing Director of Applied Research, Melissa Brown generates unique insights into risk trends by consolidating and analyzing the vast amount of data on market and portfolio risk maintained by Axioma. Brown’s perspectives help both clients and prospects to better understand and adapt to the constantly changing risk environment.