I often read articles written by stock market pundits who argue that now is the time for growth stocks to outperform value stocks. Value stocks have trounced growth stocks since 2000 and it's time for the growth to finally beat the value stocks again, or at least that is what we are told. It is true that investment styles are cyclical, but I really question whether an investor would be better off listening to the pundits and trying to time such market reversals of fortune.
While sleuthing around on the Internet I came across some old versions of the Callan Periodic Table of Investment Returns that I have posted previously. I entered all of the data I found from 1980-2006 into a spreadsheet for small cap indices (Russell 2000, Russell 2000 Value, and Russell 2000 Growth), large cap indices (S&P 500, S&P/Citi 500 Value*, and S&P/Citi 500 Growth*), a broad-based foreign stock index(Morgan Stanley Capital International Index for the developed stock markets of Europe, Australasia, and the Far East ("MSCI EAFE index")), and an index of bonds (Lehman Brothers Aggregate Bond Index ("LB Agg.")).
As shown in the chart below (click on the image for a larger view), the Russell 2000 Value index has outperformed all other investment styles over the time frame, returning 4522.32%, which is an average annual return of 15.26%. The Russell 2000 Growth Index was the worst performer, on the other hand, providing a total return of just 937.98% over the time period, or about 9.05% per year. The formidable return of the Russell 2000 Value index is not surprising, considering that Small Cap Value stocks have routinely outperformed other investment styles over long periods of time as I have previously discussed.
What is surprising is just how poor the returns were for the Small Cap Growth stocks in the Russell 2000 Growth index - for all of the risk involved, investors are not adequately compensated, seeing as how the LB Agg. Index returned 948.45% over the time period, an average annual return of about 9.09% with far less risk.
Another thing I found surprising is that the S&P 500 Index provided much larger returns that the overall Russell 2000 Index. Small cap stocks absolutely trounced large caps during the 1970s, so I guess this is to be expected.
An additional item of interest is the return of the MSCI EAFE Index versus the S&P 500. As shown, the MSCI EAFE Index returned 1849.57%, or an average annual return of 11.63% during the time period. The S&P 500 provided much larger returns - a total return of 2802.82%, or an average of 13.29% between 1980 and 2006. I expect that the MSCI EAFE Index will catch up to the S&P 500's performance in the future, given that the U.S. runs an enormous trade deficit with the rest of the world and the U.S. dollar will inevitably weaken.
* The older charts I found provide data for the S&P/Barra 500 Value Index and the S&P/Barra 500 Value Index, instead of the S&P/Citi 500 Value and Growth Indices, respectively, during the time period from 1980-1986. I'm not sure whether the older S&P/Barra indices are substantially the same as the S&P/Citi indices, but they appear to be so.
*** Edit - January 21, 2014 ***
I have updated this chart with results through 2013.