Portfolio managers face the challenge to achieve excess returns comparative to a benchmark for their private or institutional clients. Researchers such as Fama and French (1992, 1996) or Lakonishok, Shleifer, and Vishny (1994) caused a stir with their findings that various investment styles tend to accomplish superior returns over a long-term horizon. Their findings proposed that value stocks tend to outperform growth stocks.
This bachelor thesis raises the question whether value or growth fund managers are able to achieve a persistent outperformance relative to their internal and external benchmark. The findings have a crucial influence on investors considering an investment into the equity market by an active or passive portfolio management approach.
Table of Contents
1 Introduction
1.1 Problem Definition
1.2 Course of the Investigation
2 Techniques and Principles of Value and Growth Investing
2.1 Introduction and Characterisation of Value and Growth Investing
2.2 Instruments to Determine the Investment Style
2.2.1 Price-to-Earnings Ratio
2.2.2 Price-to-Book Value Ratio
2.2.3 Price-to-Cash Flow Ratio
2.2.4 Dividend Yield
2.3 Classification of Value and Growth Stocks and Funds
2.3.1 Classification in Theory by Researchers
2.3.2 Classification in Practice by Financial Data Providers
3 Performance Evaluation of Value and Growth Investing
3.1 Development of the Value Premium
3.2 Reasons for the Value Premium
3.2.1 Rational Explanation
3.2.2 Behavioural Explanation
3.2.3 Random or Chance Occurrence Explanation
4 Equity Fund Managers´ Capabilities to Generate Alpha
4.1 Problem Definition and Question of Analysis
4.2 Data Set Methodology
4.3 Performance Measurement Methodology
4.4 Results
4.4.1 Empirical Results of Equity Fund Managers´ Capabilities
4.4.2 Further Empirical Results Provided by Academic Researchers
4.5 Reasons for the Outperformance of Growth Equity Funds
4.6 Recommendations for Investors Based on the Empirical Findings
5 Summary and Conclusion
Research Objectives and Key Topics
This thesis examines whether value or growth equity fund managers are able to achieve a persistent outperformance relative to internal and external benchmarks. By analyzing empirical data from 2007 to 2011, the study evaluates the investment capabilities of these managers and provides recommendations for investors regarding active versus passive management strategies.
- Comparison of value and growth investment styles
- Performance evaluation based on internal and external benchmarks
- Analysis of fund manager capabilities in generating alpha
- Impact of market crises on fund performance
- Assessment of the "value premium" in the equity fund market
Excerpt from the Book
1.1 Problem Definition
Portfolio managers face the challenge to achieve excess returns comparative to a benchmark for their private or institutional clients. Researchers such as Fama and French (1992, 1996) or Lakonishok, Shleifer, and Vishny (1994) caused a stir with their findings that various investment styles tend to accomplish superior returns over a long-term horizon. Their findings proposed that value stocks tend to outperform growth stocks. Throughout the academic activities, additional researchers supported the findings of Fama and French. They achieved the same results in different time periods and with different explanations for the superior returns. Investors closely tracked the academic findings because of the effects on their investment behavior. When value stocks tend to outperform growth stocks within a certain investment region, fund managers with a value investment approach should beat growth fund managers. Investors, who invest in the funds market, expect from their portfolio managers excess returns compared to a stated benchmark. Otherwise, investors would have no incentive to invest in an active portfolio management approach.
This bachelor thesis raises the question whether value or growth fund managers are able to achieve a persistent outperformance relative to their internal and external benchmark. The findings have a crucial influence on investors considering an investment into the equity market by an active or passive portfolio management approach. Therefore, three different hypotheses will be discussed:
1. If both investment styles generate a persistent alpha in comparison to their internal as well as external benchmark investors shall follow an active investment approach.
2. If one investment style outperforms the other one in comparison to a certain benchmark investors shall choose the favourable style while investing in an investment region.
3. If both investment styles underperform relative to their internal as well as external benchmark investors shall invest in passive index tracking vehicles.
Chapter Summaries
1 Introduction: This chapter defines the research problem regarding active portfolio management and sets out the study's hypotheses.
2 Techniques and Principles of Value and Growth Investing: This section provides a comprehensive overview of investment styles, classification instruments such as P/E and P/BV ratios, and how financial data providers categorize these funds.
3 Performance Evaluation of Value and Growth Investing: This chapter outlines the historical performance of value versus growth strategies and explores rational, behavioural, and random explanations for the value premium.
4 Equity Fund Managers´ Capabilities to Generate Alpha: This main part of the thesis details the empirical methodology, presents the analysis of fund performance from 2007-2011, and discusses reasons for the observed outperformance of growth funds.
5 Summary and Conclusion: The final chapter synthesizes the findings, confirming that while growth funds showed better relative performance in the studied period, passive investment strategies remain a significant consideration for investors.
Keywords
Value Investing, Growth Investing, Equity Funds, Alpha, Benchmark, Performance Evaluation, Portfolio Management, Price-to-Earnings Ratio, Price-to-Book Value, Financial Ratios, Value Premium, Market Efficiency, Active Management, Passive Management, Asset Allocation
Frequently Asked Questions
What is the core focus of this thesis?
The thesis investigates the capability of equity fund managers to generate sustainable excess returns (alpha) using either a value or a growth investment strategy.
What are the primary thematic areas covered?
The work covers the definitions of value and growth investing, financial metrics used to classify these styles, historical performance evaluations, and the analysis of active fund management versus benchmark performance.
What is the primary objective of the analysis?
The objective is to determine if one investment style (value or growth) consistently outperforms the other relative to both internal and external benchmarks over the 2007-2011 period.
Which methodology is employed in the study?
The study utilizes an empirical analysis of 105 German-issued equity funds, employing performance measures such as Jensen's alpha, Sharpe ratio, Information ratio, and Treynor ratio.
What is addressed in the main body of the work?
The main body focuses on the empirical data set, performance measurement methods, and the evaluation of how these active funds performed against various market benchmarks during and after the financial crisis.
Which keywords characterize the research?
Key terms include Value Investing, Growth Investing, Alpha, Performance Evaluation, Portfolio Management, and Benchmark.
How did growth funds perform compared to value funds in this study?
The empirical findings indicate that growth funds generally outperformed value funds in a head-to-head evaluation during the 2007-2011 observation period.
Does the author recommend a specific investment style?
The author concludes that a recommendation depends on the investor's individual risk-return profile, but notes that active growth funds showed more consistent outperformance against the benchmarks analyzed.
What role does the benchmark play in the findings?
The choice of benchmark significantly influences the assessment; growth funds showed superior performance when measured against both internal and external indices, while value funds struggled to beat external benchmarks.
What impact did the financial crisis have on the findings?
The study specifically updates previous academic research by incorporating the period of the 2008 financial crisis, highlighting how different styles performed under extreme market volatility.
- Quote paper
- Thomas Müller (Author), 2012, Value versus Growth - An Empirical Analysis of Equity Fund Managers´ Capabilities to Generate Alpha, Munich, GRIN Verlag, https://www.grin.com/document/192205
