The analytical framework set out by Benjamin Graham and David Dodd in 1934 was very intricate, whereas the constituents of value indices such as MSCI’s are selected systematically using a few simple metrics.
There is certainly a strong correlation between the performance of systematic value factor indices and the performance of active value managers, but most if not all value managers put their own slant on the framework Graham and Dodd set out.
It was Warren Buffett who said in his 1992 investment letter that value and growth are “joined at the hip”, a reference to the fact that successful investing is about more than just buying stocks with low price-to-earnings or low price-to-book multiples.
The value versus growth question is often posed as a binary one. This is misleading. Buffett’s “hip” quote illustrates that growth and value are not two sides of the same coin, but two components of an investment approach.
This is also evident in the way MSCI constructs its indices.
One might think constituents of growth and value indices are simply those towards each end of the same axis. This is wrong. MSCI’s value indices are composed of stocks that have low price-to-book, priceto-earnings and price-to-dividend multiples. Its growth indices on the other hand have nothing to do with high value, but are composed of stocks that exhibit high forward and historical earnings per share growth, historical sales per share growth and internal growth rate.
This is important because it means there is the potential for stocks to be classified as both value and growth at the same time; as we shall see, there are currently two that fall into this category within the world index.
Russell Investments’ methodology is slightly different, with its value indices incorporating stocks that are both cheap and low growth, and its growth indices stocks that are both high growth and expensive.