Growth vs. Value - Kailash Concepts

Introduction: The Historical Context of the Pain Trade for Value Oriented Investors
Trouble Comes in Threes
Could the Glamour in Growth Lose its Glow?
Conclusion
Exhibits

Introduction: The Historical Context of the Pain Trade for Value Oriented Investors

Kailash takes some comfort that press articles have begun to emerge questioning if value investing is dead. For our organization the relief comes from the very anecdotal observation that consensus views on nearly anything tend to be healthy markers that the consensus view is soon to be wrong. As long-time readers know, Kailash embraces a core investment philosophy that embraces both reasonably priced growth but readily admits to a value bias.

Since our inception in 2010 this predisposition was largely a modest headwind that we successfully overcame. More recently however, the headwind has felt more like a gale of irrational exuberance and left us feeling quite foolish. Our view is that growth has become the beneficiary of investor herding. As we documented in our white papers on Amazon, Buffett’s Valuation Measure and Private Equity Kailash believes many investors have abandoned basic arithmetic and are stampeding into names and investment products based on the crushing career pressure faced by allocators.

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Figure 1 below shows the cumulative excess return for investors in the Russell 1000 Growth Index compared to the Russell 1000 Value index since the end of 1989. In the first decade of the data you can see that growth trounced value by a stunning 319% through August of 2000 with virtually all of that outperformance occurring in the last two years (Stage 1). From growth’s relative peak in August of 2000 until it troughed against value in May of 2007, value took its revenge, outperforming growth by 280% (Stage 2). What is remarkable about this is that in the first 6 months of Stage 2 growth was cut in half while value stocks stood still. In just these first six months growth investors lost the entire advantage that had accrued to them over the prior decade. Since May of 2007 through today (Stage 3), growth has gone on to utterly trounce value by over 120% with an incredible 35% of that excess return coming in just under the last three years. In an advancing tape the actual impact of this is worth noting: since December 2016 the value index has advanced at just over 8% annually while the growth index has risen by 21%, each year. Annual performance spreads of this magnitude were last approximated in growth’s run over value from the end of 1998 until its peak in 2000. KCR would like to highlight that the affinity for growth is largely in the speculative realm, creating what we believe are some of the best GARP investing opportunities we have ever seen.

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SERVICES

As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade. If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you. KCR also offers a wide range of easy-to-use but sophisticated tools. Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
Kailash Capital Research, LLC ’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias. L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.

ADDITIONAL READING

The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital Research, LLC and its affiliates (collectively, “Kailash Capital Research, LLC ”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital Research, LLC . In preparing the information, data, analyses, and opinions presented herein, Kailash Capital Research, LLC has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital Research, LLC , however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital Research, LLC and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital Research, LLC – All rights reserved.

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