Post on 23-Dec-2015
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008LCN200803-2013997
Growth and Value Investing
Equity Investment Classification
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Large-cap 9,500 Mutual funds 283 Stocks
Mid-cap 2,486 Mutual funds 701 Stocks
Small-cap 2,066 Mutual funds 4,908 Stocks
What are Growth and Value Stocks?
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Growth stocks High growth rate of earnings, sales Low book-to-price, high price-to-
earnings ratios Paying lower or no dividends
Risks Future growth does not occur as
expected Book-to-price ratios rise unexpectedly,
price-to-earnings ratio decline unexpectedly
Value stocks Slower growth of earnings and sales High book-to-price, low price-to-
earnings ratios Higher dividend yields Turnaround opportunities
Risks Evaluation of stocks as good value is
misread Difficult to stick to value policy when
prices are beaten down
Risk and Return by Size and StyleGrowth and value stocks 1969–2007
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Large value
Mid value
Small value
Large growth Mid growthSmall growth
14
12
10
8
16% Compound annual return
15%Standard deviation
17 19 21 23 25 27
Range of Annual ReturnsGrowth and value stocks 1969–2007
Past performance is no guarantee of future results. Each bar shows the range of compound annual returns for each asset class over the period 1969–2007. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
60% Return
40
20
0
–20
–40
Large growth Large value Mid growth Mid value Small growth Small value
47.6%
–32.4%
39.4%
–22.1%
10.8%
51.3%
–33.0%
9.7%
61.2%
–20.8%
13.6%
60.5%
–40.6%
9.1%
58.3%
–24.4%
14.8%Compoundannual return:9.2%
Growth and Value Investing1969–2007
Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of 1969. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
14.8%10.89.29.1
Compound annual return
• Small value• Large value• Large growth• Small growth
$220.84
$55.22
$31.02$29.69
$1,000
100
10
1
0
1969 1975 1981 1987 1993 1999 2005
Growth and Value Investing1998–2007
Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of 1998. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
$1.53
$1.75$1.84
$2.79
10.8% 6.35.84.3
Compound annual return
$5
0.7
1
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
• Small value• Large value• Small growth• Large growth
One-Year Growth and Value Cycles1969–2007
Past performance is no guarantee of future results. Performance differential measures the outperformance of each asset class over one another on a 12-month rolling basis. Each 12-month rolling return represents the annualized return over the prior 12 months. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
12-month rolling returns
40%
30
20
10
• Large growth • Large valuePerformance differential
75%
50
25
0
–25
1969
Jan–Dec
1974
Jan–Dec
2004
Jan–Dec
1999
Jan–Dec
1994
Jan–Dec
1989
Jan–Dec
1984
Jan–Dec
1979
Jan–Dec
Three-Year Growth and Value Cycles1969–2007
Past performance is no guarantee of future results. Performance differential measures the outperformance of each asset class over one another on a 36-month rolling basis. Each 36-month rolling return represents the annualized return over the prior 36 months. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Performance differential
36-month rolling returns
• Large value• Large growth
0
25
50%
5
10
15
20
25%
2006200119961991198619811976Dec 1971
2004199919941989198419791974Jan 1969–25
0
Growth and Value by DecadeCompound annual rates of return by decade
Past performance is no guarantee of future results. *Based on the years 1928–1929. **Based on the years 2000–2007. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
1920s* 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s**
20
15
10
5
0
–5
• Growth stocks• Value stocks
25% Return
Moving With the MarketAnnual performance comparison 1988–2007
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
• Large growth • Large value • S&P 500
50%
40
30
20
10
0
–10
–20
–30 2006 20071988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Bull Market PerformanceBooming 1990s: 1995–1999
Past performance is no guarantee of future results. Hypothetical value of $1,000 invested at the beginning of 1995. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
$4,500
3,500
2,500
1,500
500
1995 1996 1997 1998 1995 1997 19981999 19991996
Growth Value
• Small growth:
Compound annual return:
17.6• Mid growth: 23.2• Large growth: 34.4%
$4,379
$2,842
$2,249
Compound annual return:• Large value:• Mid value:• Small value:
24.8%17.716.4
$3,033
$2,258$2,136
Bear Market PerformanceEarly 2000s bear market: July 2000–December 2003
Past performance is no guarantee of future results. Hypothetical value of $1000 invested at the beginning of July 2000. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
$1,800
1,400
1,000
600
200 July2000
July2001
July2002
July2003
July2000
July2001
July2002
July2003
• Small growth:Compound annual return:
–5.8%• Mid growth: –7.3• Large growth: –14.5
$577
$767$812
Compound annual return:
• Large value:• Mid value:• Small value:
–0.913.716.5% $1,705
$1,568
$969
Growth Value
Blending Growth and Value
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Balance growth investments with those that produce income
Invest in both large and small companies, as well as a mix of well established and new companies
Consider investments that are currently out of favor but have potential to increase in value
Blending effectively may cushion against the many ups and downs in the market
Style Winners and Losers1998–2007
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Highestreturns
Lowest returns
20071998 1999 2000 2001 2002 2003 2004 2005 2006
• Large growth (LG)
• Large value (LV)
• Mid growth (MG)
• Mid value (MV)
• Small growth (SG)
• Small value (SV)
• Diversified portfolio (DP)
12.1LG
8.7MG
7.4SG
4.1DP
2.5LV
0.4MV
–5.6SV
47.6%LG
16.6LV
10.7DP
6.4MG
2.3SG
0.8MV
–4.1SV
51.3MG
39.3SG
29.8LG
23.2DP
13.1LV
4.8MV
4.6SV
25.4MV
22.7SV
–3.0LV
–3.4DP
–18.5MG
–22.0LG
–22.6SG
14.8SV
3.9MV
–0.4SG
–2.9DP
–7.2MG
–8.8LV
–20.1LG
–12.8MV
–13.3SV
–19.8DP
–20.1LV
–21.5MG
–23.9LG
–27.8SG
48.4SG
47.9SV
43.9MV
40.3MG
39.0DP
29.9LV
24.8LG
21.1SV
20.8MV
19.6SG
15.8DP
13.4LV
13.1MG
6.7LG
14.0MV
9.2SV
8.8MG
7.9DP
7.0LV
4.7SG
3.3LG
23.2SV
22.1LV
15.3DP
13.9 MG
13.0MV
10.8SG
8.9LG