By Mark Barnes, head of investment research, Americas
When we first developed the Russell Style Indexes, their primary objective was to provide appropriate benchmarks for active asset managers. But investors soon discovered growth and value indexes could be useful for other purposes—such as the basis for passive investments or as tools for implementing tactical style tilts.
With 40 years of Russell Style Index performance history now in the rearview, we can observe several distinct cycles of style rotation over the past several decades, as detailed in our research paper. And for investors looking to express tactical views on the timing of these shifts, Russell Style Indexes are designed to be valuable implementation tools.
Growth and value
We construct Russell Style Indexes by dividing the Russell 1000 and Russell 2000 equally by market value into growth and value stocks. As such, by design the Russell 1000 and Russell 2000 Growth and Value Indexes represent half of their parent indexes.
As shown below, this symmetry is evident when comparing style index annualized 3-year rolling excess returns relative to their parent indexes. What’s also noteworthy about the below chart is the clear cyclicality of growth and value relative performance, where the Russell 1000 Growth and Russell 1000 Value have cycled in and out of relative favor over the past 40 years.
It should perhaps come as no surprise that the most pronounced cycle in this chart was during the late 1990s tech bubble, when growth stock returns initially soared relative to value—and then abruptly plummeted when the bubble burst. However, the onset of the Great Financial Crisis later reversed this trend, though to a lesser extent until more recently, when the COVID-19 crisis spurred a period of stronger growth outperformance.
Strategic Tilting
The emergence of COVID-19 vaccines has sparked hopes that a return to a more normal environment could be in the not-so-distant future. This has some investors wondering whether a market rotation toward value might be on the horizon—and whether to implement a tactical style tilt to express this view.
For investors contemplating a style rotation, Russell Style Indexes can be an easy, transparent way to track these styles. We’ve refined the construction methodology for these indexes over time such that they’re an objective, complete representation of the growth and value composition of their parent indexes. The Russell growth and value indexes always sum up to the overall market—making them a precise and fully transparent tool for strategic style tilts.
For example, an investor who believes value will outperform can tactically deviate from a 50-50 growth/value policy benchmark by allocating 55% to value and 45% to growth. The investor can implement these shifts either with passive investments using the style indexes as the basis, or by using the indexes as benchmarks for active manager allocations. In either case, the transparency and modularity of the Russell Style Indexes have lent them enduring utility for expressing tactical views.
This post first appeared on Feb. 24 on the FTSE Russell blog.
Photo Credit: Ishtaure Dawn via Flickr Creative Commons
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