By Russell Investment Group

Quite clearly, as the US economy remained hot, growth stocks led impressively. When the economy turned downward, investors turned to value stocks, even though their overall performance declined from 1998 to 2002. Notice the volatility as well. The disparity of growth returns swung over 63% while value was less than 29%.

Closing the Gap in 2003
Performance for the first three quarters of 2003 has clearly favoured growth stocks as the economy — and the US stock market — began a long-awaited recovery.

"It's the boom and bust cycle," Warburton said. "Or perhaps bust and boom is more accurate." Investors have gone through a protracted defensive period in which US growth stocks lost much value. Recovery has increased the expectation that growth stocks will benefit more than value stocks.

A Strategy That Avoids Temptation
The return patterns exhibited here might lead one to conclude that it's simple enough to predict whether growth or value will lead depending on the economic cycle. But counting on such timing rarely is a consistently successful strategy due to the well-documented unpredictability of global economies. "We have a human tendency to extrapolate past results into future outcomes," Warburton said. "But predicting what kind of market environment we're going to have is extremely difficult. So many different factors are involved, including valuations and economic cycles. It's easy to say in retrospect why one style dominated over a certain period, but it's very difficult to predict how long present dominance will continue."

Warburton cites the late 1990s as a prime example of chasing performance — and ultimate disappointment. "While it's an extreme example, it's true that some investors didn't warm up to growth stocks until the end of 1999 and into 2000. They finally rushed to buy when those stocks peaked, and they got hurt."

Diversification as Your Safety Net
Russell typically maintains a style-neutral approach in its multi-manager investment products. "Rather than trying to decide when to invest in each style," Warburton says, "we diversify our portfolios by identifying and selecting both growth and value managers. We believe it's more beneficial to pick skillful managers and maintain a balanced portfolio than it is to predict which style will forge ahead and when."

No strategy is immune to struggle, Warburton warns, but diversification and rebalancing offer sound opportunities to sell stocks in one style when they're higher and buy stocks in the other when they're lower leading to more consistent returns and reducing volatility.




Copyright© Frank Russell Company 2003. All rights reserved. See Important Legal Information. Date of first use: November 25, 2003.

This is a publication of our parent, Frank Russell Company. It should not be construed as investment, legal, or tax advice. The contents are for general information purposes only, and you are urged to consult your own investment, legal, or tax advisor concerning your own situation and any specific investment questions you may have. For further information about these contents, please contact Frank Russel Canada Limited.

Diversification does not assure a profit or guarantee against loss in declining markets.

As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns. Rebalancing your portfolio may create tax consequences on the taxable portion.

Small company issues are subject to considerable price fluctuations and are more volatile than large company stocks. Small cap funds may involve considerably more risk than funds investing in larger-cap companies.

Russell 1000® Value Index: Measures the performance of those Russell 1000® Index securities with lower price-to-book ratios and lower forecasted growth values, representative of US securities exhibiting value characteristics.

Russell 1000® Growth Index: Measures the performance of those Russell 1000® Index securities with higher price-to-book ratios and higher forecasted growth values, representative of US securities exhibiting growth characteristics.

Russell 2000® Growth Index: Measures the performance of those Russell 2000® Index securities with higher price-to-book ratios and higher forecasted growth values, representative of US securities exhibiting growth characteristics.

Russell 2000® Value Index: Measures the performance of those Russell 2000® Index securities with lower price-to-book ratios and lower forecasted growth values, representative of US securities exhibiting value characteristics.

Russell 3000® Growth Index measures the performance of those Russell 3000® Index companies with higher price-to-book ratios and higher forecasted growth values, representative of US securities exhibiting growth characteristics.

Russell 3000® Value Index: Measures the performance of those Russell 3000® Index companies with lower price-to-book ratios and lower forecasted growth values, representative of US securities exhibiting value characteristics.

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Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

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