The following is an excerpt from our recently published research, which is now available to download.
In it, we explore the composition of the stock market, which, as it is often defined today, is being driven by companies traditionally considered to be of the growth style, whereas value is becoming increasingly synonymous with business models more prone to disruption.
You may download the publication in its entirety by clicking here.
All too often, investment consultants and mutual fund research houses bifurcate the public equity universe into two camps, growth or value, and the blend of the two is often referred to as the “stock market.” These two diametrically opposed style boxes, we are told, are separated by a valuation dividing line that an index provider defines. Value stocks are your cheaply-priced, often higher dividend paying legacy companies, while growth stocks often contain painfully high valuations and generate little free cash flow today in hopes of larger profits down the road. These two styles are often diametrically opposed philosophically, with one or the other’s fall from relative-performance favor being hailed as temporary. Managers firmly grasping to one style then attempt to provide reassurance that mean reversion will occur eventually and rational minds will prevail, inevitably causing the investment cycle to snap back in their favor. As tempting as it is to contribute to the debate of which style box will be in/out of favor, we think a far more insightful exercise is to take a step back and attempt to identify the drivers that cause relative under-/out-performance.
The crux of this analysis is that far more of the stock market, as it is often defined today, is being driven by companies traditionally considered to be of the growth style, whereas value is becoming increasingly synonymous with business models more prone to disruption. Therefore, an ability to discern “disruptor” versus “disrupted” is far more valuable to determine which stocks will likely be winners over the next decade, rather than anchoring an investment process to arbitrary, static valuation boundaries.