The differences between growth and value might be lost on average investors, but among financial professionals, few investing concepts inspire more fervor.
Value stocks are companies that sell for less than they’re worth, based on their fundamentals; this investment style is favored by bargain hunters like Warren Buffett and Bill Miller, portfolio manager of the Legg Mason Value Trust. Growth companies are expected to make substantial gains in revenue and profit relative to their peers. The share prices of growth stocks are apt to reflect the market’s hopes for the future rather than their current fundamentals.
Wall Street has produced many options for professionals and individuals looking for ways to adhere to these investment styles, including a slew of actively managed funds focused exclusively on growth or value stocks of all sizes. The major indexes have also been sliced up into style pies.
Now, Standard &Poor’s is in the process of updating its style indexes, with plans to offer two different ways to track value and growth stocks, including one that seeks to more closely match the strategies used by fund portfolio managers.
S&P is phasing out its Barra-style benchmarks, which relied solely on a stock’s price-to-book value to determine whether it would be listed in a value or growth index, in favor of an approach devised by Citigroup that evaluates seven different factors. In addition, instead of classifying stocks as either growth or value, the new methodology will give companies a style “score.” The stocks that are not 100 percent growth or 100 percent value will have their market caps distributed accordingly between the indexes.
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