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Growth versus value: Will the tides change?

East versus West, Seabiscuit versus War Admiral, Kansas City- versus Memphis-style barbecue—history, sports, and culture are filled with long-standing rivalries and reversals of fortune. Such ebbs and flows can also apply to the dynamics of investments and specifically those of growth and value stocks.

The long dominance of growth stocks has continued well into 2020, even when it seemed the pendulum would swing the other way after the pandemic-induced market correction earlier in the year.

It's been a banner period for growth equity funds, such as Vanguard U.S. Growth Fund, which posted the highest absolute return among Vanguard's active equity funds over one-, three-, five- and ten-year periods through July 2020. The growth tailwind, combined with superior stock selection, led to the stellar results.

Meanwhile, value funds, or those straddling growth and value, also rebounded strongly from the market lows in March, but returns were modest when compared with their growth counterparts. Many investors believed that the next downturn would lead to the reversal of growth's bull run, but instead, the unique environment gave extra momentum to the upswing.

Despite the challenges presented by the pandemic, certain key growth companies benefited further from their economies of scale, networking effects, and near infinite access to cheap capital, according to Daniel Pozen, senior managing director at Wellington Management Company and equity portfolio manager for the balanced Vanguard Wellington Fund.

"COVID has been the equivalent of throwing gasoline on the fire" further fueling the disparity between growth and value, Pozen said in a recent webcast.

Our clients often ask when the pendulum will swing the other way. It helps to take stock of the past and examine how the current trend took root.

Tracking the shift to growth

From the end of the previous global financial crisis until the pandemic, we experienced an economic expansion of near-record duration. This expansion, with support from a low interest rate environment, has greatly benefited growth equities, a trend that outlasted even the short-lived market correction we had in the first quarter.

The second quarter highlighted the further transition to the "new economy," with sizeable increases in growth-oriented technology stocks such as e-commerce platforms. The dispersion between growth and value returns has widened by almost 14 percentage points for the second quarter and 32 percentage points over the 12 months through June 30.

Total returns as of June 30, 2020








Russell 1000 Value Index







Russell 1000 Growth Index







Difference in percentage points







Returns are annualized for periods longer than one year. Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Source: Vanguard, using data from Russell, as of June 30, 2020.

The next chart shows the difference in annualized total returns between the Russell 1000 Value Index and the Russell 1000 Growth Index over rolling five-year periods. Value stocks were dominant for a number of years after the dot-com implosion of 2000 until the 2007–2009 global financial crisis. From 2009, an expanding economy has been the tailwind for growth stocks, creating the longest period that growth has outperformed value.

Difference in annualized total returns over rolling five-year periods

Difference in annualized total returns over rolling five-year periods

Source: Vanguard, using data from Russell, as of December 31, 1983, through July 31, 2020.


Growth stocks have become even pricier

When looking at the characteristics of the Russell 1000 Value and Growth Indexes over the last five years, one thing stands out: Growth has become more expensive over time, leading to strong returns and increased market capitalization of the Russell 1000 Growth Index. Other metrics have followed suit. Price to earnings, price to cash flow, price to book, and price to sales have also increased, while the same metrics for Russell 1000 Value have essentially stayed the same. One can argue that growth's higher projected earnings-per-share growth can partly justify the higher price.


June 30, 2015

June 30, 2020


Russell 1000 Value

Russell 1000 Growth

Russell 1000 Value

Russell 1000 Growth

Number of stocks





Market capitalization ($ millions)





Dividend yield










Est. 3–5-year EPS growth





Price/cash flow




















Source: Vanguard, using data from FactSet, as of June 30, 2020.

A handful of names drove much of the returns

A few stocks were responsible for almost one-third of the stock market's gain. During the five years through mid-2020, the overall Russell 1000 Index had a cumulative return of 65.5%. But if you eliminate the top five contributors—Microsoft, Amazon, Apple, Facebook, and Alphabet (the parent company of Google)—the index's return would drop to 45.5%, shaving off 20 percentage points. (Source: Vanguard, using data from FactSet, as of June 30, 2020.)

Fund managers who had no exposure or an underweight to these few names lagged growth benchmarks. This was true even for growth-oriented portfolios if they sidestepped these dominant positions.

When the pendulum swings the other way

Inevitably, value will eventually take the lead again, as it did through most of the first decade of this millennium. But Pozen declined to hazard a guess on when, thinking it a fool's errand.

Outside of the timing, he believes stock selection will once again supplant the pandemic-influenced environment as the primary driver of differentiated returns. Value companies will benefit from the eventual return to more normal conditions and a potential shift from monetary to fiscal stimulus that could change the inflation and interest rate environment.

Investors and investment committees will have to decide whether they have enough conviction in the continued dominance of growth or the resurgence of value. If there is no strong conviction, maintaining a balanced exposure to both growth and value in your portfolio can be a great way to deal with the uncertainty.


SEPTEMBER 28, 2020

Risk of Second Wave of COVID-19 Lockdowns

By Jeffrey Kleintop

Many investors are eyeing the politics surrounding the U.S. elections as a major factor for the market in the coming months. But, the politics of a potential return to national lockdowns in response to the resurgence of COVID-19 cases may be a bigger potential market mover for investors to consider. A widespread return to national lockdowns would likely mean a return to recession for the global economy and a bear market for stocks.

The potential for a return to lockdowns appears to be on the rise, pressuring stock prices in September. U.S. virus cases have started to tick back up again, while parts of Europe are experiencing a steady resurgence. Israel has instituted a second national lockdown. The United Kingdom has rolled out new restrictions. Soaring new cases in France and Spain are prompting politicians to consider similar measures. However, we believe a return to widespread national lockdowns is highly unlikely for three reasons:

Healthcare systems not overwhelmed: Positive cases are rising in many countries, but the percentage of those tested that are positive, along with hospitalizations and deaths from COVID-19, remain relatively low.

Precision pays off: Mid-summer second waves of virus cases in the U.S. and China faded when narrow, localized restrictions were put in place, achieving success while limiting  overall economic impact.

Huge cost: The economic and human toll of national lockdowns is now known to be severe; the first half of 2020 experienced the worst global recession since the Great Depression.

Examining each of these leads us to believe a return to widespread national lockdowns and a related return to global recession and bear market is highly unlikely.

Healthcare systems not overwhelmed

The outbreaks in Europe differ from earlier this year in that they have not been accompanied by a similar spike in hospital admissions, according to the European Centre for Disease Prevention and Control. Additionally, the hospitalization rate of those with COVID-19 has fallen sharply in the U.S., according to the U.S. Center for Disease Control.  These examples provide some reassurance that healthcare systems may not become as overwhelmed as they were earlier this year.

While there has been a rise in the number of new cases of COVID-19, it is the result of the large number of those being tested. The rise in new positive cases isn't alarming when viewed as a percentage of those being tested, as you can see in the chart below. The percentage of positive tests are really only ticking up in France and Spain.

Positive percentage of COVID-19 tests remains low outside of France and Spain

The global number of deaths each day tied to COVID-19 remains stable, steadily averaging around 6,000 per day since March, even though the number of daily new confirmed cases has more than tripled. It is our opinion that hospitalization and deaths are more important factors (rather than new cases) when it comes to the likelihood of lockdowns.

Precision pays off

The U.S. experienced a spike in new daily COVID-19 cases this summer, as you can see in the chart below. Although the Fed warned about the danger posed to the economy by the second wave accompanied with expiring fiscal stimulus programs, the return of targeted restrictions in some states did not lead the economy back into recession. In fact, the labor market continued to improve over the summer months, recovering half of the jobs lost earlier in the year.

China also saw surges in cases in parts of the country this summer and responded with localized and targeted restrictions that were effective, but didn't reverse the strong economic rebound. The International Monetary Fund forecasts that China will be the only country in the world to grow its economy in 2020, despite experiencing the first wave of COVID-19 at the beginning of the year and a second wave this summer.

France and Spain are seeing a second surge in infections after loosening lockdown restrictions, while Italy has kept the disease under control with local and targeted restrictions. For example, in August, Rome ordered a closure of nightclubs and introduced a rule that face masks must be worn in all crowded places between 6pm and 6am. Visitors to bars and restaurants must record their names and numbers to aid in tracking contact with any infected person. Companies have been encouraged to extend work from home arrangements into the fall and those that have reopened must comply with wearing face masks, body temperature scans, physical distancing and COVID-19 testing.

The economic consequences of these effective measures have so far been modest, but three factors may influence the economic impact of future restrictions, represented by measures taken in the U.K.:

How widespread they are. If they extend only to travel and entertainment, which make up less than 10% of GDP in most economies, the drag may be minor, especially considering those industries have yet to really recover anyway. But if business closures spread to construction and manufacturing, where working from home isn't an option, the impact could be far greater. U.K. leaders introduced new restrictions last week, but nowhere near as onerous as a national lockdown with an earlier close for restaurants and bars, reversal of plans to allow live audiences at sporting events next month, a request to work from home when possible, and to wear masks in public places.

How long they last. So far, many measures introduced to combat the second wave have been announced in advance of being implemented and with limited time frames—often a few weeks—allowing businesses to respond and plan appropriately. The more abrupt and open-ended the measures, the more negative their likely economic impact. The restrictions announced for the UK were timed longer than most, at up to six months.

If accompanied by new stimulus. Additional fiscal stimulus can help mitigate the impact of restrictions, if targeted appropriately. The U.K. recently coupled new restrictions with new aid in the form of 10 years of guaranteed loans for businesses, pay-as-you-go rates on loans, extend Value-Added Tax cuts, and an extension of benefits for the unemployed. 

Huge cost

Politicians now have a much better idea of the economic costs of using widespread lockdowns to bring the virus under control. 

Countries that deployed lockdowns earlier this year experienced an average peak-to-trough fall in GDP of 13.5%, as calculated by Capital Economics.

The cost of fiscal stimulus pushed up public debt ratios by an average of 35% of GDP, according to research by Capital Economics. 

The full impact on the labor market has been obscured by worker furlough programs, but tens of millions of workers have lost their jobs.

The high economic and social costs make it more likely governments will respond to new outbreaks with equally-effective targeted restrictions rather than new national lockdowns. 

Market reaction

The recent weakness in the purchasing manager indexes for services suggests that the momentum of the rebound in economic activity seen over the past few months is fading, even in countries where new virus cases are falling. Now the risk is will renewed restrictions to contain the outbreaks send the global economic recovery into reverse?

V-shaped recovery losing momentum?

Avoiding a boom and bust economic environment generated from the rapid removal of economic restrictions followed by a renewed national lockdown should be a priority for politicians. With broad-based vaccinations unlikely this year, measured restrictions may be needed to effectively contain the virus while being efficient in their economic cost. While stocks have been wary of measures taken in September to contain the outbreaks, investors may soon get comfortable with these effective alternatives to widespread shutdowns. 

But the biggest political risk facing investors is the potential for a more dramatic reaction to COVID outbreaks by politicians in the form of national lockdowns that could lead to a new bear market for stocks. In addition, such severe measures could prompt a rotation back into the COVID-winner U.S. tech stocks and away from cyclically-oriented international stocks that have outperformed recently.



Here's Why You Should Rebalance (Again)

Rebalancing during a bear market can feel painful, but it pays off in the long run.

In the simpler times of January 2020, we cautioned against the risk of letting your portfolio's equity allocation run too high in a bull market. Now that we're in the midst of the first bear market since the global financial crisis, we're resurfacing our research to focus on the impact that bear markets can have on buy-and-hold portfolios and the risks investors court by not rebalancing in extreme down markets.

In our previous article, we highlighted how letting a portfolio run in an extended bull market could lead to a portfolio with a higher drawdown risk because of its higher equity allocation. During a bear market, a buy-and-hold investor experiences the opposite. The equity allocation shrinks far faster than the allocation to bonds. For example, an investor that entered the year with a 60/40 allocation to stocks (45% U.S. equity and 15% international equity) and U.S. bonds, respectively, would have a portfolio that was roughly 50% equity and 50% bonds as of the end of March 20. If a 60% allocation to equities is appropriate given that investor's goals and risk tolerance, then rebalancing back to that equity allocation target when the portfolio is this out of whack should be beneficial over the long term. To be sure, now is also a great time to revisit previous assumptions about risk tolerance.

Rebalancing, or selling a portfolio's best performers to buy the worst performers periodically, is one of the best ways to protect against market movements altering a portfolio's risk profile. The advantages of rebalancing are especially apparent in tax-favored accounts, such as IRAs or 401(k)s, where tax implications are not a concern. Rebalancing may also be prudent in taxable accounts, but the advantages aren't as straightforward as it may trigger capital gains taxes depending on the investor's income level and capital gains exposure. As such, this article evaluates the merits of rebalancing in tax-favored vehicles.

Given how volatile stocks have been over the last month, rebalancing can also be a scary proposition. But rebalancing has historically helped portfolios rebound faster when markets do eventually turn around. To see how it has helped, we examined what the investor experience would have been like over the past 26 years without rebalancing.

The Ebbs and Flows of a Buy-and-Hold Portfolio
To illustrate a buy-and-hold investor's experience, we built a 60/40 portfolio using the following indexes:

  • S&P 500 (45%)
  • FTSE All-World ex U.S. Index (15%)
  • Bloomberg Barclays U.S. Aggregate Bond Index (40%)

We ran the portfolio's returns from 1994 (the most recent inception date of the three indexes) through March 20, 2020, and tracked its equity allocation and drawdowns over the period. Exhibit 1 shows how the weighting in equities changed over time.

The portfolio's equity allocation grew to 76% from 1994 through August 2000, leading into the first major bear market of the 2000s. It again peaked just before the start of the financial crisis in October 2007, with 73% in equities. At the end of 2019, the allocation to equities reached its highest level over the entire period, nearing 80% of assets.

Unfortunately, the elevated allocations heading into the last two bear markets meant more pain during those drawdowns and a longer wait to recover those losses. Exhibit 2 shows the max drawdown during both periods and how long it took the portfolio to recover its losses compared with the same portfolio rebalanced annually at the end of each year, arguably the simplest rebalancing strategy. It also includes the current drawdown through March 20.

The most relevant part of this historical analysis for investors today is the longer recovery periods faced by the portfolios that didn't rebalance when things finally did start to turn around. This is because in both prior periods, the buy-and-hold portfolio entered the recovery phase with a lower allocation to stocks than the portfolio that regularly rebalanced while having to climb out of a deeper hole. The length of the current bear market is uncertain, but the implications it has for your portfolio are not. Maintaining allocations in line with the strategic target by rebalancing should help keep your portfolio and long-term goals aligned during this volatile time.