Hi, all, I have simple question, what is value, what is growth, any criteria to determine a manager is value or growth manager ? what chacteristic associated with growth/value managers. Many thanks. A new comer.
Growth A strategy whereby an investor seeks out stocks with what they deem good growth potential. In most cases a growth stock is defined as a company whose earnings are expected to grow at an above-average rate compared to its industry or the overall market Value The strategy of selecting stocks that trade for less than their intrinsic value. Value investors actively seek stocks of companies that they believe the market has undervalued value investors select stocks with lower-than-average price-to-book or price-to-earnings ratios and/or high dividend yields P.S - a simple search would have given you the above answers …
This is not simple at all… Value manager generally invest in value stock - low PE, high dividend yield and discounted shares. Growth manager on the other hand invest in growth stock - simply higher expecting growth against its universe. You can more likely distinguish the two types of manager by looking at their stock holding and potentially investment process. IMO, growth tends to hold more resource and IT whereas value tends to hold mature business. Most fund managers are either value or growth, but there are a small portion of them is what we call growth at reasonable price (GARP) managers, which has minor value and growth tilts.
Buffett said investing is all about value. “What other kind of investing is there?” he asked. “Are we going to have nonvalue investing? Are we going to have tipster investing … dream investing? I’ve never understood what the alternative is.”
Here here… “An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” Can never go wrong quoting Buffett or Graham…You are either investing or engaging in speculation. Those who hold true to the tenet’s of “Value” investing don’t refer to it as that…as accountant23 stated - it’s just straight up investing
You can also define the two by what they are usually looking to achieve, so… Value managers’ portfolios have lower than average PEs / BVs, but also… they try to outperform over the stockmarket cycle, by roughly keeping track with a rising market and outperforming meaningfully in down years. The converse can be said of growth managers.
If you buy it and it goes up, it was value.
Value and growth are two different “styles” of investing. In the Graham sense, both styles are seeking to buy value (you’re never trying to buy things that are too expensive), but there is a difference in where you think you can spot it. VALUE INVESTING as mentioned, tends to look for stocks that have relatively low Price-Earnings or Price-Book ratios, when compared with either intrinsic value (typically hard to measure, but usually some form of discounted cash flow) or, alternately, when compared with ratios for similar companies in the same industry. This tends to focus on how much of cashflow or earnings you can purchase with your investment dollar, given the company’s existing performance and very moderate assumptions about company growth. If you are using book value, there is an interpretation that there is less risk in buying low P/B value companies because your equity is theoretically backed by assets that a company can distribute in the case of bankruptcy. The recent problems in the ABS market may dispense with that interpretation, however. Another way to look at value investing is that prices fluctuate around “true value” and you try to buy on the dips on the idea that prices will eventually revert to true value and you’ll profit on those returns. This assumes that you have a correct model of what “true value” is, which is where the real trick is. There is something called “the value trap” which has to do with the fact that you can’t blindly buy stuff that is low P/E or P/B, because maybe the company is in trouble and about to die and that’s why the price is low. If you can do due diligence to show that the company is not about to die (maybe it will be turned around or bought by someone), then it’s not a bad strategy. GROWTH INVESTING tends to focus on stocks that are at the high end of the P/E or P/B range. In this case, you are still trying to get a good deal (i.e. a value), but the value comes from having superior insight into what is making the company grow, relative to the rest of the market. If you are correct in your investment and buy a growth company, you are betting that the market has underestimated the growth component of the stock price and that the price will either a) go up as earnings increase, faster than the rate of the market as a whole, or b) P/E multiples will go up as other market participants discover the company’s growth potential. Conversely you sell a growth company, you are betting that the market has overestimated the growth component of a stock price. As a result, the very highest P/E ratios tend to be bad investments, but the ones just underneath are plausible investments in the right market environment. P/E can be high for basically two reasons 1) you anticipate higher than average growth for the company (compared to the economy or the rest of the market), or 2) the company is somehow safer (more stable cash flows, immune to some industry risk, etc). If you can’t explain a high P/E for one of those two reasons, it’s a sell candidate. — Historically, the value part of the market has tended to outperform the growth part of the market. I tend to interpret this as meaning that if a P/E or P/B is low, a company likelier on average to be a healthy-but-underpriced company than a high P/E or P/B company is to represent superior growth prospects. Growth stocks tend to have more dispersion in returns too, meaning that you have more duds and spectacular stories than the value world, where the extremes are in a narrower range. HOWEVER, Damodaran (sp?) reports that growth managers have historically outperformed their benchmarks by more than value managers. This may suggest that human analysis may be better at spotting growth opportunities than a mechanical investment style. My interpretation is that because growth is more forward-looking and involves difficult-to-quantify aspects of markets and competitive behavior, the addition of a human manager makes a bigger difference in the growth universe than the value universe. Finally, many analysts refer to “Core” as the range of P/E or P/B that sits between the Value range of the spectrum and the Growth range. Core stocks have P/E or P/Bs fairly close to the market average or median.
Great comments, so I guess if we run style research, particularly, run the snail trail, according to Book to Price ratio over time period, we can distinguish whether the manager is value or growth ?
It is said value investors find the securities which are sold below their underlying business value, which can be valued by NPV, comparable sales of simiar business or liquidation price. Some people say true value managers are those who always buy securities, of which the underlying business is undergoing or is going to have a significant change, which may discourages other investors and thus depresses the current secuities price so it’s lower than the intrinsic value.
richarge. I’ve never done a style analysis myself, but from my understanding, if you regress a manager’s returns on something like the morningstar style indices (say, a growth, value, and core index), you may be able to get some sense of whether a manager is a value or growth style manager. You’d need to have pretty strong correlations or standardized coefficients that are significant before trusting a style analysis like that, I’m guessing. I’d think you’d probably get a better shot at figuring something like this out by just asking the manager what style he/she uses, and then using the regression to confirm whether it’s true or not. Of course, part of it depends on having a long enough track record for doing analysis. For mutual funds, you have daily NAVs. For hedge funds, you might only have monthly or quarterly values, which demand a much longer history.
Personally…I think those are marketing terms. I realize the different criteria and different emphasis on value and growth…but even in growth names, the manager is seeking value relative to other options. Very simply, from a mile up, everything a mgr buys should be a value. my two cents
richarge: What bchadwick says is straight out of the L3 curriculum on determining manager style. (You might even want to post to that forum.) When they give example questions they’ll show correlations typically better than 0.95 when a manager follows a style, and maybe .7-.8 or lower when she doesn’t.
Thanks DarienHacker, thanks Bchadwick, I make more sense, so somehow, it is qualitative measurement, not quantitative ? Thanks again
I don’t think there is a quantitative cutoff. I think a lot of people just look at the top 1000 PE ratios of the Russell 3000 universe and call that the growth universe. The bott 1000 are value, and the middle 1000 are core, but there are no reasons it has to be that way. Others may know better, however.