The Ideal Blend of Growth and Value

Abstract

Style-based investment strategies have flourished in the United States. Recently, international style-based strategies have also been increasing. In addition, many investment professionals have advocated diversified style-based portfolios, that is, portfolios holding both growth and value funds. In practice, however, it is not clear that style-based diversification works well to increase return and decrease risk. The authors' empirical analysis strongly suggests that style-based diversification in the U.S. is not ideal. They find that a well-constructed, genuinely style-neutral core portfolio will likely generate higher long-term risk-adjusted performance in the U.S. than comparable growth and value portfolios. Internationally, the results are not as clear. Although international style-based portfolios outperformed core funds, the relatively new and changing style environment, coupled with the strong growth bias of international core funds, suggests that these historical results may not be indicative of future results.