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Playing Defense with Growth Stocks (That’s Right, Defense)

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Insights and Market Perspectives

Playing Defense with Growth Stocks (That’s Right, Defense)

Author: Stephen Duench

July 17, 2020

One of the defining aspects of the equity market so far this year has been the outsized returns of growth stocks. In June alone, the S&P 500 Growth Index gained almost 10% more than the S&P 500 Index, marking its best month of outperformance against the broader market in 14 years, according to AGFiQ data.  

But what is perhaps just as remarkable—and yet less recognized —is the fact that growth can now be characterized by its defensive attributes as much as anything else.

Indeed, our analysis shows several factors that are synonymous with growth stocks have recently experienced significant deviations in their market betas, which, in the past, have hovered near or at 1 on average. For example, momentum and forward earnings growth currently have rolling three-month betas of 0.65 and 0.69, respectively, but these scores were also as low as 0.59 and 0.5 in early June.

Three-Month Rolling Beta of Forward Earnings Growth

Source: AGFiQ with data from FactSet as of July 9 2020. Thirty-day beta calculation for custom factor composites relative to S&P/500.  Factor composites are a proprietary mix of alike factors and measure solely with the S&P/500 universe.

In other words, both factors have become far less volatile in relation to the overall market than would normally be the case. And while it isn’t unheard of for growth-like characteristics to have betas that are well below 1, it is rare—especially when taking into consideration the current betas of other factors like value and dividend income that have increased just as uncharacteristically to current scores well above 1 in recent weeks.

Beta Spread between Forward Earnings Growth and Deep Value

Source: AGFiQ with data from FactSet as of July 9 2020. Thirty-day beta calculation for custom factor composites relative to S&P/500.  Factor composites are a proprietary mix of alike factors and measure solely with the S&P/500 universe.

As a case in point, the beta spread last month between forward earnings growth and deep value was the most extreme its been in over two decades. Moreover, the only other time it was anywhere close to this divergent was in the early part of 2009, right before the value-fuelled start to the bull market in equities following the Great Financial Crisis.

Of course, that doesn’t mean growth’s reign as an outperforming, defensive juggernaut can’t continue, but like most other market deviations of this magnitude that have come before it, there’s a high probability that it will end sometime soon rather than later.

Stephen Duench is a vice president and portfolio manager at AGF Investments Inc. He is a regular contributor to the AGF Perspectives blog

To learn more about our quantitative capabilities, please click here.

The commentaries contained herein are provided as a general source of information based on information available as of July 10, 2020 and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

AGF Investments is a group of wholly owned subsidiaries of AGF and includes AGF Investments Inc., AGF Investments America Inc., AGF Investments LLC, AGF Asset Management (Asia) Limited and AGF International Advisors Company Limited. The term AGF Investments m ay refer to one or more of the direct or indirect subsidiaries of AGF or to all of them jointly. This term is used for convenience and does not precisely describe any of the separate companies, each of which manages its own affairs.

™ The ‘AGF’ logo is a trademark of AGF Management Limited and used under licence.

About AGF Management Limited

Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.

For further information, please visit AGF.com.

© 2022 AGF Management Limited. All rights reserved.

Written by

Stephen Duench

Stephen Duench, CFA®

Vice-President and Portfolio Manager

AGF Investments Inc.

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