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A growth firm? It is just not an intuitive concept. You could ask 10 different people what Chevron is, you will get 10 identical answers: It's an energy firm. Ask the same 10 people if Chevron is a growth or value firm and you may get 10 different answers, along with some quizzical looks. For our purposes, we chose to look at the pure style approach—the S&P 500 Pure Growth and Pure Value Indexes—in an attempt to measure the performance of indexes pulled from the same universe as our sector indexes and that emphasize style.
Style Performance
These summary figures don't capture the full story, however. Correlations vary significantly over time, as the graph of one-year rolling correlations shows in Figure 9. In the recent past, we see correlations approaching 1 during the financial crisis, then decreasing in 2010 as markets recovered and shifted away from the risk-on/risk-off mentality, and most recently increasing again as economic recovery falters in the U.S. and debt worries dominate in Europe. Regardless, the trend is clear: a sharp spike in average correlations, with fewer periods of significant dispersion. Pure growth, in particular, has enormously high correlations to the S&P 500, over virtually any period studied, suggesting that any diversification benefit lies in the value portion of the equation.
Significantly lower correlations exist in brief periods in late 2007 and summer of 2006, but clearly the most dramatic divergences between the two style indexes occur in the 1999 to 2002 period, which saw tech boom and bust. Investors looking for a clearly different pattern of returns between the two style indexes going forward have little to hang their hat on here. Recent history shows that return patterns have diverged occasionally; sometimes by a great amount. But accessing this divergence seems more akin to tactical rather than strategic allocation—timing the market, in other words. As with the sectors, the style correlations tend to converge during periods of high volatility and market stress, which makes intuitive sense. If the companies in each sector are moving increasingly in lock step with each other, it stands to reason that portfolios cutting across these sectors would as well, regardless of their exclusion of a portion of the market (core). Correlations are only part of the picture. Risk/return measurements provide more insight into recent history of the pure style indexes. The low correlation over the 15-year period, driven in part by the low and negative correlations seen in the 1999 to 2002 range, might lead one to expect that returns over the 15 years would differ greatly from value to growth. In fact, the compound annualized returns differ by only 13 bps, with value at 8.0 percent and growth at 8.1 percent. The cumulative return chart for the period highlights the different paths the two indexes took to the same end (see Figure 10).
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