Value and Growth, Theory and Practice

Abstract

The definition of value-based investing is widely accepted by both academics and practitioners, but there is confusion and disagreement as to the definition of growth-based investing. There is some statistical support for generic value and growth multifactor ranking models. Given different holding-period sensitivities of alpha potential for value and growth, there appear to be two ways to exploit the two styles: the typical combining of pure styles in a portfolio, or the less widely recognized use of a combined value/growth model. One important conclusion is that active style exploitation of alpha is inherently incompatible with capitalization-weighted benchmarks.