Growth or value? It is an age-old question, like chocolate or vanilla. But why has growth investing been trouncing value over the past decade? It is likely investors' preference for growth is not about shifting tastes or the result of short-term factors, but rather is due to secular changes in the economy and a flaw in one of the main ingredients in the flavor of value investing.
Over the past decade, the Russell 1000 Growth index has returned about 40% more than the Russell 1000 Value index. The single biggest contributor to that gap is the weak performance of low price-to-book stocks, even after eliminating the impact of the underperformance of financial companies in the value category. This driver of equity performance is critical because trillions of dollars are indexed to style benchmarks like the Russell value and growth indexes, where classification is determined in large part by price-to-book value.