Equity investors have historically observed a steady ebb and flow of growth versus value cycles over many years. In the last decade, growth stocks have decidedly outperformed value, but since late in 2020 value has started to outperform.1 This has created a dilemma for investors with growth-heavy portfolios. They are aware of the risk their concentrated growth positions present, and a pressing question is whether they scale into value for diversification? What if the recent outperformance of value fails to be sustained, as has regularly been the case during the last 10+ years?
We think that investors should consider making an allocation to a core equity strategy which aims to offer a return stream that is less dependent on style cycles and provides diversification relative to growth-focused portfolios. Our analysis suggests that core managers tend to hold stocks with high quality characteristics while being conscious of the valuation level — similar to a style of investing referred to as “Growth at a Reasonable Price” or GARP.2 By avoiding the lowest quality and the richestpriced names, core managers tend to generate resilient alphas over both value and growth cycles.