Faculty Scholarship 1994 - Present

Value, Growth and Style Rotation Strategy in the Long Run

Much research has been devoted to the risk and return attributes of a stock versus a bond portfolio over time. However, relatively little research has been focused on the long-term risk-and-return characteristics of a value versus a growth investment strategy. With the increasing popularity of these well-known investment styles, particularly when it is applied to a self-directed retirement account, there is a need to educate investors about the risk-and-return characteristics of a value versus growth style over different time horizons. This study, therefore, seeks to fill that information gap. We investigate the performance of value, growth, and style rotation strategies across different time horizons using value-at risk and conditional tail expectation. Our empirical results show that value stocks exhibit greater risks and higher returns than growth stocks in the short run. However, value stocks will outperform growth stocks in terms of both risk and return in the long run. The superiority of value stocks over time still exists even under the assumption that stock returns are non-mean-reverting. The performance of a simple style-rotation strategy is also evaluated. The empirical results show that a rotation strategy can improve long-run risks but that it will not deliver adequate returns as compared to either a value or a growth-only portfolio. Our results are based on observed capital markets history and empirical resampling procedures and can be used to help individual investors determine the best-suited investment styles given their own unique investment horizons.