Abstract
Studies done in the past by financial researchers and practitioners have focused on style investing
which has today become one of the most well-documented global phenomenon. This research
paper discusses the two main styles of investing, namely ‘value’ and ‘growth’. The underlying
idea that shares with low multiples – commonly known as value shares, outperform shares with
high multiples known as growth shares, has found wide acceptance in literature. The need for the
study emanated from the apparent conflict between the contrarian community and the value line
where the former argues that low price-earnings (P/E) shares consistently produce returns greater
than the average shares and the latter quite the contrary, that the higher the P/E, the better, hence
the need for an empirical study to get a real picture from the largest shares on the Johannesburg
Stock exchange (JSE), namely the shares that constitute the Financial Times Stock
Exchange/Johannesburg Stock Exchange (FTSE/JSE) Top 40 Index.
This study focused on the performance of value and growth shares for the FTSE/JSE Top 40 Index
(“the market”) and seeks to determine whether either investment strategy outperforms the market,
that is, would an investor get market beating returns when investing in value shares compared to
investing in growth shares. For the purposes of this study, we evaluated the performance of various
portfolios for the period of December 2009 through to December 2020. In defining the parameters
of our study, we divided the constituents of the FTSE/JSE Top 40 Index into growth and value
based on their respective price-to-earnings ratio (P/E) going back to December 2009. This created
three main portfolios: namely, Value, Median and Growth portfolios. Each of the three portfolios
can be seen as a mutual fund having a strategy of buying the shares in the given P/E portfolio on
January 1, holding the portfolio for one year, and then liquidating and reinvesting the proceeds in
the same P/E portfolio (on January 1) the following year. To determine which style outperformed
the market, the absolute returns and risk-adjusted returns for portfolios composed of value and
portfolios composed of growth shares were compared.
The results of this research indicate that over the 10-year period of the study, on average, the
growth portfolios had higher returns (also risk-adjusted) compared to the market (FTSE/JSE Top
40 Index) while returns of the value portfolios underperformed both the market and the growth
portfolios. The findings further show that between 2010 – 2019, growth portfolios outperformed
the market in seven (8) of the ten (10) years while the value portfolios only managed to outperform
the market in two (2) of the ten (10) years. A statistical test of the return spreads shows that there
is no significant difference in performance between growth shares and the market and also between
values shares and the market, meaning that our findings were not statistically significant, and we
could not draw any clear conclusions from our results. However, the study did contribute with new
knowledge by increasing the data available for style investing in South Africa and by also
highlighting a need for further study into the market over different periods for example during the
global financial crisis. The practical implications however are that while one strategy may
outperform for a given period, no single strategy can consistently deliver outperformance forever
and investors need to be cognizant of this to deliver consistent outperformance.