Which do you want, ride or return?

That's the rude question investors need to ask themselves as they consider the future. We can invest for excitement and party conversation. Or we can invest to have more money.

Once again, dull value investing has produced higher returns with less risk. To be sure, it didn't look that way in 1998. In that year the average large cap growth fund--- a fund that invested in large capitalization growth stocks--- provided a return of 33.12 percent, according to the Morningstar database. Large cap value funds returned 12.81 percent in the same year. That's a head turning gap, more than 20 percentage points.

The rout continued in 1999, giving growth funds what appeared like an unbeatable advantage over value funds. The average large cap growth fund returned a stunning 40.91 percent, blasting by the 6.83 percent return of the average large cap value fund.

Many value funds found themselves in net redemption, with shareholders redeeming more shares than they were buying as hot money rushed to growth funds.

But it was just a bubble.

The lead reversed last year and has continued into this year. As of October 2, the 5-year return of the average large cap value fund, an annualized 8.51 percent, was handily ahead of the 5.78 percent annualized return of the average large cap growth fund. Indeed, the same relationship holds for mid cap and small cap fund averages--- value has trumped growth.
Value Trumps Growth Over Last 5 Years
Capitalization Size Average Value Fund Average Growth Fund
Large 8.51 percent 5.78 percent
Mid 10.11 4.14
Small 8.88 3.80
Source: www.morningstar.com, fund category averages for period ending 10/2/2001
What you got, as a growth investor, was lots of risk and ride, but less return. Over the same 5-year time period, growth funds were far riskier than value funds. One measuring tool is standard deviation, a statistical measure. If we check the amount of price fluctuation, the average growth fund had a standard deviation of 27.01 percent while the average value fund had a standard deviation of 17.63 percent. While both are high figures, a growth fund investment would need to be diluted with 35 percent money market fund to have the same price risk as the average value fund.

Is this just a freak event, another weirdness from the techno-hysterical 90's?

I don't think so.

In addition to the growing body of research that favors value oriented investing--- the investing that concentrates on stocks that sell at relatively low multiples of price to earnings, price to book value, and price to cash flow--- the factual record shows that all the hype and sizzle of growth fails to beat value over the long term.

The evidence?

In addition to beating growth over the last 5 years, value has beaten growth over the last 10 and 15 year investing periods. While the advantage becomes slender over the 15-year period, value funds have been about two-thirds as risky over longer periods as growth funds. As you can see from the table below, the average value fund has beaten the average growth fund over the last 12 months, 5 years, 10 years, and 15 years. While growth can, and does, beat value over short periods--- as it did in 1998 and 1999--- over long periods growth investing repeatedly looks like a suckers game.
Value Trumps Growth: Higher Returns, Less Risk
Fund Category 12 months 5 years 10 years 15 years 10 Year Standard Deviation
Large Value ( 3.67) 11.33 12.40 11.63 14.42
Large Growth (40.86) 9.91 10.92 11.44 21.14






Mid Value 8.82 12.64 13.55 11.83 16.02
Mid Growth (38.49) 9.18 11.29 11.25 26.83






Small Value 16.50 12.55 13.57 11.50 15.66
Small Growth (27.76) 5.76 11.77 11.46 27.46
Source: Morningstar Principia Pro, data for period ending 8/31/01. All figures in percent.
The Shift from Growth to Value and from Large to Small, observed last year

How things stood when we wrote about this in July

Tuesday: James Barrow at Windsor II, one of the largest value funds