Download each part of our trends in growth and value series
Cycles and market regimes
The enduring appeal of style investing lies in its intuitive nature and ease of use. Even with the rise of more intricate factor strategies, the original Russell style methodology creates clear segmentation of the market along meaningful and powerful lines.
Growth and value created an almost Shakespearean dialogue, where subsequent generations of investors have debated, measured market risks and allocated towards their investment objectives through the lens of these two contrasting, yet complementary, investment styles.
These papers examine four critical questions on the evolution of U.S. growth and value style market regimes, namely:
- How long do growth and value market cycles typically last?
- How impactful are oscillations between growth and value?
- How do style regimes transition? Are shifts slow or sudden?
- What factors motivate performance disparities between growth and value?
The recent shift to value lends a renewed credence to these cycles within the growth and value paradigm, especially following the unprecedented Great Growth Regime of the last decade plus. This analysis will focus on the initial question, introducing a methodology to compare different growth and value regimes so as to quantify their length and consistency.
Here we leverage over four decades of Russell 1000 Growth and Value data not only to understand historical patterns and behaviors, but to better contextualise our current market positioning. Ultimately we find style regimes are not transitory phenomena measured in months, but durable trends measure on multi-year horizons.
After fifteen years of striking growth dominance, the return of value style premia from deep hibernation underscores the strength and impact of market undercurrents. Indeed, the original Russell Style Indexes introduced in 1986 provide an elegant means to capture these tidal forces within the broader market. This segmentation along lines of growth and value involves only three intuitive data inputs - namely price to book, historical earnings growth and expected earnings growth - yet produces powerful results.
This analysis is the second in a four-part series breaking down the dynamics of growth and value cycles in market returns, the first of which examined the duration of the 9 style regimes since 1979. The core question this paper investigates centres on just how impactful these style trends have been historically - we examined the cycle longevity, but what is their magnitude? Are style differences mere ripples in the oceanic scale of market returns or are they seismic forces whose tremors reverberate market wide?
The motivating factor behind this question is that since 1979, Russell 1000 Growth and Value Style indices have produced eerily similar returns, differing by only 8.7% after 43 years. If over the long run both style strategies have delivered investors to approximately the same place, how large precisely are the fluctuations between growth and value - and more importantly, are the results material to investors? By examining performance data spanning 9 style regimes, we find style returns are highly significant with the magnitude of style trends approximately 40% larger, on average, than the expected market rate of return. This analysis explores the nuances of style return behaviour, how this performance can be quantified, and most importantly, the practical implications for investors.
Do different typologies exist in terms of how style regimes transition and can understanding their behaviours better inform investment decisions?
Our analysis takes a three-fold examination of how growth and value style strategies rotate between favourability. First we investigate the relative aggressiveness of shifts to growth versus shifts to value, second we quantify the concentration of style returns arising at inflection points, and finally we decipher volatility patterns that characterise regime transition.
Historically style regimes transitioned on average every 46 months —yet investors have been blindsided to this reality by the preceding fifteen-and-a-half-year growth regime beginning in 2006. It is only prudent to rediscover this pivotal market dynamic from quantitative perspective.
Points of differentiation:
- This study analyses 43 years of Russell 1000® Growth and Value Index histories, spanning nine distinct style regimes since 1978, to uncover the fundamental differences between growth and value transitions and the implications for investors
- Using a methodology based on the ratio of total returns between growth and value strategies, the impacts of mistiming regime transition with a three-month leading and trailing window of error is assessed
- Style returns are not a monolith—using the lens of the Gini coefficient, the uneven distribution of growth and value active returns are quantified through regime progression