Episode - Growth vs Value

Sharpe Focus is a new podcast series featuring discussions with the Nuance Investment Team. We will be covering topics that we believe our partners will find insightful. Nuance is a boutique value manager that is 100% employee-owned. 

The team focuses on buying leading business franchises with sustainable competitive positions that are trading at a discount to our internally derived fair value. We aim to outperform our primary and secondary benchmarks on an absolute and risk-adjusted basis, as measured by Sharpe ratio, over the long term.

In this episode, the Nuance Team discusses the current environment of growth outperforming value, and why we believe in value investing over time.  

The views expressed are those of Nuance Investments as of the date of this podcast and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as investment advice. To view the most current and standardized performance figures available click here for Nuance Mid Cap Value and here for Nuance Concentrated Value. To view the most current top holdings click here for Nuance Mid Cap Value and here or Nuance Concentrated Value.

Investing involves risk, including the possible loss of principal. For more information or a copy of our disclosure brochure, please contact client.services@nuanceinvestments.com. Past performance is not a guarantee of future results.

Jack Meurer, CFA

D. Adam West, CFA

Paul Gillespie

[00:00] Paul Gillespie

Hi everyone, it’s Paul Gillespie from Nuance Investments, and I want to welcome you to our podcast, Sharpe Focus, with Nuance Investments. Today we’re here to talk about something that seems to be on a lot of investors’ minds these days, which is growth versus value.

Obviously, as a value firm, we believe in value investing over the long term, and today we’re going to spend some more time talking about why we focus on value investing and believe in it, what the current environment looks like, and in an environment where growth has significantly outperformed value, while we still believe in value over the long term.

I’m joined today by two of our portfolio managers, Jack Meurer and Adam West. Jack and Adam, thanks for joining today.

[00:51] Jack Meurer

Yeah, happy to be here, Paul.

[00:55] Adam West

Thanks, Paul. Great to be here.

[00:58] Paul Gillespie

All right, well, with that, let’s jump right in, and Jack, let’s start the conversation with you by taking a step back and discussing why we believe in value investing.

I think everyone knows our goals of beating the value benchmarks and the S&P 500 over time with less risk, but let’s spend a little bit of time from a big-picture standpoint on why we as a firm decided to focus on value versus growth.

[01:29] Jack Meurer

Yeah, it’s a good place to start the conversation. First, I think it’s worth making the point that we believe both broad styles, so that’s value and growth, that they each have their own merits and deserve their allocation in a diversified portfolio of stocks.

Secondly, I know it’s conventional to talk about growth and value as if they’re wholly different approaches, but we certainly view growth on an individual company basis as a really vital component to the investing equation, even within these more classically value-priced stocks. With that being said, as for why our approach at Nuance is more of a value-style approach, I think there’s pretty compelling empirical evidence that value stocks, so these are stocks that are priced low, relatively speaking, to their fundamentals, such as book value or earnings, that the stocks with these characteristics have outperformed more expensive stocks over long time horizons. One of the longer historical data sets available, which has been compiled by Professors Eugene Fama and Ken French, it starts all the way back in June of 1926 and goes through today, so this is about 100 years of data.

That data has shown that value stocks have delivered annualized returns of over 13% versus growth stocks returning less than 10% per year over that longer time horizon. Value stocks have also had better results on a sharpe ratio or a risk-adjusted return basis as well over the long term. If you study this data, value investing can certainly move in and out of favor over time, and I’m sure we’ll talk about that some, but I think if you’re an investor with a long-term investment horizon and you’re focused on both return and risk, we think value-style investing is a pretty compelling approach to take.

[03:28] Paul Gillespie

Jack, obviously, more recently, and I do want to spend some time talking about the current environment, more recently, growth has significantly outperformed value, so to hear you talk about how, historically speaking, value stocks have not only outperformed but done so on a risk-adjusted return basis as well, why do you think that value has been able to outperform growth historically?

[03:54] Jack Meurer

It’s a good question. I think it really has to do with what a value-priced stock really is. I think, very simply, all else equal, a stock priced low relative to its earnings power, to its book value, et cetera, it’s reflecting relatively low expectations for the future prospects of that underlying business.

Those low expectations, they could be warranted in some cases, where the stock might be cheap for a reason. This is often referred to as a value trap, and at Nuance, our team spends a lot of time in our process specifically trying to avoid these types of situations, but a cheap stock can also represent a fundamental mispricing. I think this is ultimately the reason why value investing works over time, because if the stock is cheap due to negative circumstances that aren’t permanent but rather transitory or temporary in nature, then that cheapness can create a margin of safety for investors and ultimately create an opportunity for higher expected returns as whatever that transitory item is resolves itself, and that allows the fundamentals of the business to improve, it allows for resetting of expectations higher, and ultimately valuation expansion.

I think the value investor has a lot of winds at their back that can drive this long-term outperformance, but of course, you need a long enough investment horizon and enough patience to really let those forces ultimately work in your favor over the long-term, which is one of the reasons our team is most focused on long-term results.

[05:36] Paul Gillespie

Adam, Jack just set us up pretty nicely about how value has outperformed growth historically speaking, but I think that would surprise a lot of people today given today’s market and the fact that growth has really outperformed value over the short term. When we think about that, I want you to spend a little time telling us about that and also how historical is this period where growth is outperforming value compared to other periods that we’ve gone through where growth has outperformed value.

[06:10] Adam West

Yeah, so we did a study looking at rolling three-year returns of growth versus value and it surprises nobody that has been paying attention that growth over that last three-year period has dramatically outperformed value. For instance, if you look at the Russell Midcap Growth benchmark and set the period into middle of 2025, Russell Midcap Growth has outperformed Russell Midcap Value by more than 40% over that three-year period. In terms of historical rolling three-year periods, that’s a seventh percentile observation if you look back 40 years.

And if you look at the Russell 3000 Value versus the Russell 3000 Growth, it tells a similar story with growth outperforming value by 53% over that time frame, which is a fourth percentile observation. So based on those numbers, we are in some rare air here in terms of growth outperforming value.

[07:08] Paul Gillespie

Do we have any opinion on what’s causing that and what impact it’s having on the market as a whole?

[07:16] Adam West

Yeah, so we think there could be several reasons for this.

One is just a greater appetite for risk in a period in which market leadership hasn’t really varied much in recent years. We think there’s also more trading by retail investors being done and we believe they’ve tended to chase or crowd into many of the same types of stocks. Flows are increasingly directed toward passive ETFs and a general focus on broad market and growth stocks.

In other words, investors in these ETFs are moving into what has worked in recent years. Also, there just doesn’t seem to be a lot of appetite for contrarians or an emphasis on valuation right now. Lastly, and this may tie into some of the other themes I mentioned, such as narrow flows, but investor euphoria for anything related to NVIDIA (NVDA), cryptocurrencies or AI in general seems to have taken over in some instances.

When you look at these companies and themes, they have admittedly seen strong revenue growth over a short period, along with strong stock performance. Our view on this subject is that AI will broadly lead to growth within that space and generally greater economic productivity and efficiencies. But there’s a potential that current investors won’t really see great returns going forward.

We view this as kind of similar to what happened in the late 90s and early 2000s with the dot com bubble. The widespread adoption of the internet was great for productivity and efficiency. It helped consumers and businesses alike pretty broadly.

But investors in 1999 and 2000 who bought shares of the most popular internet companies at the time probably didn’t experience great investment returns for a long period after that. Think of Cisco (CSCO), Dell (DELL), Hewlett Packard (HPE), NetApp (NTAP), AOL (AOL), Yahoo (YHOO), etc. You know, these are the darling internet companies at the time.

And then there are also several other companies that just went out of business entirely.

[09:28] Paul Gillespie

Adam, it’s interesting to talk about how significantly growth has outperformed value. But as you know, and our clients know, our primary benchmarks are the value indexes.

A lot of the names you mentioned aren’t in the value indexes and that have driven that growth. So how does a period like this, where growth is outperforming value by such a significant margin, impact, if at all, the value benchmarks that we are primarily competing against? Have we seen cases of historically growth-type names that would be in the Russell 3000 Value or the Russell 3000 Growth or the Russell Midcap Growth index that have made their way into value benchmarks?

[10:13] Adam West

Yeah, so we have seen some instances of this. And without getting too into the weeds, Russell classifies growth and value based on several criteria, price to book, recent revenue and earnings growth, forward projections.

But they also want total market caps to be relatively balanced between the value and growth benchmarks. Their selection criteria, along with historical growth stocks seeing outperformance, has resulted in growth becoming much more concentrated and value becoming less concentrated in terms of the number of overall companies within each benchmark. The Russell Midcap Growth currently has fewer companies than it has had at any other time since the early 90s.

The Russell midcap value currently has more companies than it has had at any other time in that time frame. And you see the exact same thing with the Russell 3000 benchmarks. I’m sure if you look out in past history, there have been examples of growth names that have crept into value benchmarks.

But the shift in the number of names between growth and value is something that we haven’t seen, at least not to this extent. Because of Russell’s classification guidelines, we’ve seen the value benchmark include companies like Robinhood (HOOD), Coinbase (COIN), and MicroStrategy (MSTR). Just using these three companies as examples, each of these were unprofitable as recently as two or three years ago, and we would deem them to have uncertain competitive positions at best.

But because we have chosen not to own these companies, just these three companies have resulted in at least 50 basis points of underperformance versus the Russell Midcap Value over the past three years.

[12:02] Paul Gillespie

Thanks, Adam. Jack, so Adam mentioned that one of the byproducts of growth outperforming value is some of these riskier stocks that we would consider historically growth stocks have found their way into the value indexes.

And not only have they found their way into the indexes, but they’ve helped driven a lot of the performance of the index. How are we seeing that broadly play out when you study the Russell midcap value index in terms of what’s working and what’s not working?

[12:36] Jack Meurer

Yeah, I think it’s really what we’ve seen is just riskier stocks work. We’ve seen an appetite for risk in general.

And I think this is really an important part of this discussion when it comes to really understanding and analyzing the current environment. And I think one that can get a little overlooked in the broader growth versus value conversation. So I don’t think it’s very controversial to say that over the last few years, there’s just been a lot of risky behavior occurring generally in the world around us.

I think if you take a step way back, you can see it outside of financial markets with things like the proliferation of buy now, pay later programs that are being used for financing what appears to be increasingly discretionary consumption, the rise of these various prediction markets, and really riskier versions of sports betting that’s been enabled by online gambling companies where what you’re seeing is less simple bets on the outcome of a game. And you’re seeing more and more bets take the form of these lower probability, potentially higher payout structures, again, done very easily through an app on your phone. And those are just a few examples.

I think within financial markets, we’ve seen no shortage of this either. Meme stocks, meme coins, SPACs, single stock levered ETFs, zero days to expiration options, and really just the general gamification of finance that’s been facilitated by a lot of these new trading platforms built around mobile apps. And the reason I give these examples is because the point is that this behavior is, frankly, widespread, and it’s even represented within the value equity indices.

And so just as one anecdote, and I know Adam referenced this, but I think it’s worth emphasizing, if we just simply look at the Russell Midcap Value Index, which is our primary benchmark for our Nuance Midcap Value strategy, and look at performance over the last three years to the second quarter of 2025, within the top 15 contributing stocks to the index performance, and again, I would emphasize this as a value index, you’ll find companies like Robinhood (HOOD), Coinbase (COIN), and MicroStrategy (MSTR) all on that top 15 list, which I think is just a microcosm of this broader risk seeking environment that we’re seeing. From a bigger picture kind of factor perspective, we’ve also seen that higher beta or higher risk stocks in both of the Russell Midcap Value and the Russell 3000 Value Indices, we’ve seen those higher risk stocks outperform the lower to average beta stocks within the indices by what’s been a pretty healthy margin over the last three years as well. And this is something that has simply not persisted over the long term, historically speaking, but something that can be observed during more speculative periods, some of these that Adam referenced and ones that we would kind of compare to the current environment that we find ourselves in today.

[15:55] Paul Gillespie

We started the call by talking about how over the long term value outperforms growth, historically speaking, but in the short term, Adam spent some time talking about how much growth has outperformed value here recently. Higher beta has outperformed lower beta recently, but that’s not always the case. Just like growth has outperformed value over the short term, over the long term, what happens, Jack? When you look at the Midcap Value Index, the Russell Midcap Value Index, the Russell 3000 Value Index, what drives the performance, higher or lower beta stocks?

[16:33] Jack Meurer

Yeah, so when you study the historical results, certainly this dynamic that we’ve seen recently, where you’ve seen pretty definitively higher beta outperforming lower beta, you’ll see that happen from time to time through history, but it’s not the case over the long term.

So, if we look at, in our case, the relevant value benchmarks, for us, the Russell Midcap Value and the Russell 3000 Value, what we’ve done is we’ve divided them into five separate beta quintiles. So, this ranges from the lowest beta to the highest beta stocks. And if you look back since the inception of the benchmarks, so this goes back multiple decades, a much longer time horizon than just the most recent few years that we’ve been discussing, you’ll find that the annualized returns of the lower to average beta quintiles are approximately the same as the higher beta quintiles.

And this is also something that you can observe if you look in the Fama French data sets as well. So, again, this goes back more than a hundred years. So, it’s been persistent historically.

Theoretically, some might think that high beta stocks should outperform low to average beta stocks, with the argument being that investors should be compensated for the higher risk with higher returns. But in practice, this has simply just not been the case. There’s a couple of potential explanations for this, but a common one that resonates with our team at Nuance is that this apparent anomaly is driven by the human being’s behavioral preference for these lottery tickets, which causes investors, in this case, to pay a premium to gamble on riskier stocks.

So, people are effectively overpaying for these low probability, potentially high reward lottery ticket-like outcomes. And this behavior has been studied by various academics. It’s been shown to in a variety of financial markets, as well as non-financial markets.

So, we think the evidence and the support for this explanation is compelling, and ultimately supports what we believe is an attractive backdrop for investing in those lower to average beta stocks over the long term.

[18:54] Paul Gillespie

I think it’s really interesting that lower to average beta stocks are able to keep up with higher beta stocks from a performance standpoint over time. And I bet most people would guess that wrong.

I think what’s really interesting is, Jack, tell us, on a risk-adjusted basis, what wins, historically speaking, within those value indexes over time? Is it the lower to average beta stocks or the higher beta stocks? I bet I can make a guess.

[19:26] Jack Meurer

Yeah. So, on a risk-adjusted basis, it’s certainly the lower to average beta stocks.

And that’s why you’ve seen our strategies at Nuance tend to invest in these lower to average stocks over time. Investing in stocks that have a similar level of return with a lower level of risk, we think, is a really attractive set of characteristics. And if you take that and you combine it with the merits of value-based investing that we just talked about earlier, we think it’s a good combination for achieving both outperformance over the long term and doing that with less risk.

So, achieving those attractive risk-adjusted returns over time.

[20:10] Paul Gillespie

And just to wrap up the beta conversation, Jack, I think it’d be helpful for clients and investors to understand how we view beta and how our team thinks about risk in the portfolio.

[20:24] Jack Meurer

Yeah. I mean, we’ve talked a lot about beta and kind of the quantitative measure of risk, but we really think about it qualitatively through our process, and we really view risk on an absolute basis. So, for us, it’s all about avoiding the permanent impairment of capital. This framework around risk, it really touches every step of our investment process.

So, starts with idea generation all the way to portfolio construction. So, we focus on risk as it pertains to the sustainability of a business’s competitive position. So, you’ll hear us talk a lot about that.

You know, risk as it pertains to the return on capital cycle that each business is exposed to, the capital allocation decisions that are made by management teams, balance sheet-related actions, and then ultimately that valuation support and our willingness to only purchase these great businesses when we believe the stocks have both more upside and less downside than the market set of opportunities. So, as one could imagine, this focus on risk throughout the process is generally going to lead us to lower-to-average beta stocks over time, but we certainly will invest in stocks that have higher betas if they meet our fundamental investment criteria. So, our portfolio kind of generally having lower-to-average beta stocks is not something that we target per se, but we also don’t think it should be a surprise given our process and our consideration of risk throughout really the entirety of the process.

[22:03] Paul Gillespie

Thanks, Jack. Last question for me, and I know we don’t ever try to concern ourselves with market timing, and I’m not asking you guys to try to predict when investors are going to start paying more attention to our style, but what I would ask you is when you look at the names in our portfolio, do you guys see any type of sentiment that things might be changing and investors might be paying more attention to some of the characteristics that our process highlights? Adam, anything in your world that seems interesting to you?

[22:43] Adam West

Right. So, obviously, like you said, we don’t have any idea on timing of these things, but one thing we have noticed is a slight increase in M&A activity for some of these lower-valuation stocks.

Just within companies that we have owned, just this year alone, we have seen several rumors of acquisitions or even attempted acquisitions that were disclosed. Calavo Growers (CVGW), for instance, disclosed an unsolicited offer that had been made to acquire the company at $32 per share. The company noted it was reviewing the offer, but at this point, it seemingly declined it probably because of a low valuation.

Additionally, Estee Lauder (EL)’s stock rallied after the death of its former chairman and patriarch. He had sort of been viewed as an impediment to the company being acquired. Estee Lauder (EL) has long been a family-held company in terms of the voting rights, and there have also been several rumors that other companies would like to acquire it.

So, the stock rallied on potential news that it might be more up for sale than it would have been prior. Obviously, we don’t know that. Those are just rumors, but it is certainly an indication that maybe somebody is paying attention to the valuation.

[24:06] Jack Meurer

Yeah, and I would add that we have seen this outside of Consumer Staples as well. For example, there’s a diagnostics and women’s health-oriented business in the Health Care sector that we own called Hologic (HOLX), and they received an offer from a couple of private equity groups to take the company private at a premium. And then another investment that we have in a leading custodian and wealth manager, Northern Trust (NTRS), they were approached by Bank of New York Mellon (BK), who expressed interest in a merger this quarter as well.

So, as we say, we don’t have a crystal ball, and we don’t know if these deals will ultimately come to fruition, but we are hopeful that this uptick in interest that we’ve seen in some of the stocks that we own, that this may be the early signs of change, that the lower-risk value-based investing that we’ve been talking about, that it may be returning to favor after, frankly, what’s been a pretty difficult stretch over the last few years. I think one of the upsides of this difficult period is we think it’s resulted in what’s been increasingly attractive valuations for a lot of these stocks. And it seems like some other parties may be seeing that value as well now, which we think ultimately is a pretty encouraging sign looking forward.

[25:38] Paul Gillespie

All right, Jack and Adam, thank you all for your time today. I think we’ve talked about what a little bit of an odd market it is with growth outperforming value and higher beta outperforming lower-to-average beta, and how that’s not the case historically. And if we continue to execute our investment process, we think that could lead to some nice opportunities over time.

Thanks for joining us today for our podcast, Sharpe Focus on Nuance Investments, and we’ll see you next time.

[26:12] Disclosure

The views expressed are those of Nuance Investments as of the date of this presentation and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as investment advice.

This audio recording should be reviewed in conjunction with the accompanying disclosure or composite presentation, which contains standardized performance figures and other important information. Investing involves risk, including the possible loss of principal. For more information or a copy of our disclosure brochure, please contact client.services@NuanceInvestments.com.