Growth and Value Performance

Value beats Growth over the longer time periods.

Looking at the historical returns of the different asset classes, we see that the value stocks have outperformed the growth stocks on relative basis.

Let’s look at the last 10-year returns of the growth index and value index. For the investment growth calculations we use the performance of the growth index fund and the value index fund for the last 10 years. We use the Vanguard growth index fund and the Vanguard value index fund returns for our calculations.

The growth index fund (VIGRX) has returned 8.52% annually in the 10 years ending 12/31/2005. The return after the taxes on distributions was 8.07% and the total return after taxes on distributions and sale of fund shares was 7.31% annually for the same 10-year period.

The value index fund (VIVAX) has returned 9.44% annually in the 10 year ending 12/31/2005. The return after the taxes on distributions was 7.92% and the total return after taxes on distributions and sale of fund shares was 7.49% annually for the same 10-year period.

As you can see from the numbers above, the value index fund did return close to a full percentage higher than the growth index fund. But an investor who invested in this outperforming value asset class in a taxable account really earned a higher rate of return? The value index fund in a taxable account is at a distinct disadvantage. The value fund has a higher dividend yield compared to the growth fund. The dividend paid out each year by the value index fund is taxed as income and that takes a bite out of the overall return. The growth index fund has a lower yield and the most of the return is capital appreciation and not taxed until the investor sells the shares in the fund.

The returns after taxes on distribution and sale of fund shares are only 18 basis points apart even though the returns before taxes differ by 92 basis points.

The value funds are good choice for the tax-exempt accounts. For taxable account it is a photo finish between the growth and value. With this said, I will rephrase the first statement of this post.

Value beats Growth over the longer time periods in a tax-exempt account.