Handbook of Finance: Investment Management and Financial Management

Chapter 30. Growth and Value Investing—Keeping in Style

ERIC H. SORENSEN, PhD

President and CEO, Pan Agora Asset Management

FRANK J. FABOZZI, PhD, CFA, CPA

Professor in the Practice of Finance, Yale School of Management

Abstract: One of the common delineations across the spectrum of active equity management continues to be the growth style versus the value style. Pension funds, for example, routinely allocate capital to both styles within the larger scheme of asset (strategy) allocation. There are strong philosophical differences between active managers that adopt these styles. Growth managers discriminate between companies on their future growth prospects, presuming that the market has underacted to positive growth potential and/or underestimated this growth. Valuation criterion, such as price-to-earnings, becomes a secondary consideration. In contrast, value managers are bargain hunters, and seek companies for which the market has overacted to dull or weak fundamentals and/or underestimated potential for future improvement. Pension consultants have sophisticated methods of categorizing growth versus value managers. The two groups of style managers tend to use radically different factors in ranking stocks. In addition, these factors also contribute to a number of available (and investable) indices that allow money managers to achieve a growth or value investment passively, and to assess their performances that are incremental to a passive benchmark. In the long-run, it is debatable ...