Risk-Adjusted Performance of Value and Growth Strategies

Abstract

Active money managers provide returns through two types of activities: stock selection and market timing. This study gives new insights into both, which can improve portfolio returns as well as client understanding of investment performance. We measure the sensitivity of stock returns to several macroeconomic factors and examine the risk-adjusted return performances of four popular value and growth investment strategies. Sensitivity to the macroeconomic factors differs across the strategies, depending on how value (or growth) is defined. Thus, not all value (nor all growth) portfolios will perform the same under a given set of macroeconomic conditions. Also, sensitivity to a given macroeconomic factor differs, varying from positive to negative to non-existent, depending on monetary policy. So a particular macroeconomic risk factor does not consistently affect portfolio performance. Last, how value or growth strategies perform relative to the general market also depends on monetary policy: after controlling for several macroeconomic factors we find that all four (only two) value portfolios earn positive risk-adjusted returns under expansive (restrictive) monetary policy regimes and growth portfolios earn negative risk-adjusted returns only under expansive monetary policy regimes. <b>TOPICS:</b>Equity portfolio management, security analysis and valuation, legal and regulatory issues for structured finance