The benefits of value investing over growth are being rediscovered by investors

Since 2008, growth investing, or placing bets on businesses that are growing quickly, has been profitable

However, the other primary investment style appears to be making a comeback.

Although I wasn't at BFIA in 2012 when our investment trust portfolio was established, the editor shares a humorous story. Since we are renowned for being contrarians, all six of the initial trust selections were "value" plays. A slight agitation occurred just prior to the publication of the model portfolio. The question, "Shouldn't we hedge our bets with a bit of growth" was followed by the addition of Scottish Mortgage, which is growth-oriented. This last-minute addition drove nearly all of the portfolio's performance in the ensuing years.

Being a value investor has been difficult over the last 17 years. In actuality, value has a stronger track record over the long run than growth. According to data cited in Breakingviews, US value stocks have outperformed their growth counterparts by an average of 2.5 percent annually since 1926.

After central banks lowered interest rates to ultra-low levels in 2008 due to the global financial crisis, value lost favor and remained there for over ten years. Companies can more easily invest in future growth when interest rates are low because borrowing money is inexpensive. This is advantageous to businesses that are growing quickly. Value began to be questioned by some as growth stocks surged ahead.

After a period of high inflation, a pandemic, and a European war, the post-2008 era is officially over. Invesco deputy fund manager Beth Shard says, "It's hard to say exactly where inflation or interest rates are going to be over the next few years, but it feels reasonable to say that on average they will be more of a feature." "Surely, the cost of something must be important in a world where money isn't free.

Value-finding: what is value investing?

In the hopes that the share price will rise, value investors purchase stocks that are below their fair value. The plan is to purchase one pound of assets for, say, sixty pence. Analysts evaluate businesses by examining information like cash flows, book value, and earnings. The most well-known value investor in the world, Warren Buffett, famously remarked: "Value is what you get; price is what you pay."

Numerous factors may be at play when a stock is trading at a discount. Investors may have overreacted to some negative news, or the company may be in an industry that has lost its appeal. The secret is to spot value traps, or businesses that are unfairly undervalued rather than those that are inexpensive for a reason.

It's crucial to identify the cause of a rerating. Maybe a new business plan is being implemented, or the management team of the company has changed.

AVI Global Trust manager Joe Bauernfreund says, "There's no point just buying something cheap and then hoping for the best." "Shareholder activism is frequently the main force behind it.

What is growth investing? aiming for expansion.

Shares of businesses that are growing quickly are purchased by growth investors. Because investors are paying for future potential rather than current earnings, they are frequently more expensive than value stocks. Since their profits are typically reinvested in new projects, growth companies don't typically pay out large dividends.

The technology sector is home to some of the most well-known growing businesses, including Tesla, Nvidia, and Meta. In the hopes of winning the AI race tomorrow, all three are making enormous investments today.

The way businesses are valued makes growth stocks more attractive when interest rates are low. Because money today is worth more than the same amount tomorrow, analysts discount future cash flows to account for the time value of money. Future cash flows are worth more when interest rates are low because the discount rate is also low.

The pendulum is swinging back, right?

A style rotation has been discussed by value investors for many years. We saw some early indications in 2022, when the tech boom reversed, but shouldn't it have happened sooner, since interest rates began to rise in late 2021? That year, when central banks raised interest rates, the Magnificent Seven lost 40% of their total value. However, share prices swiftly recovered.

Perhaps now things are beginning to change once more. For the first time since 2022, value has surpassed growth this year, according to data from Morningstar, an investment research firm that focuses on more than 800 large-cap funds worldwide. Growth funds are up about 10 percent, while value funds are up 14 percent (July 2025).

Morningstar Wealth senior portfolio manager Mark Preskett says, "A couple of key factors have driven the value resurgence." "Firstly, global value funds tend to hold a bias towards emerging-market and European companies, which have both handily outperformed the US this year.

Second, value funds typically run an underweight position in the technology sector and an overweight position in financial services stocks. The two industries' fortunes have diverged significantly in 2025, with financial stocks among the top performers so far.

When you look at the US market separately, things appear different. US tech stocks have recovered well in recent months, so US growth funds continue to outperform value. Meanwhile, the healthcare industry, which value investors frequently favor, has had difficulties. Nevertheless, it seems that attitudes are changing at this time.

You're capable. "tension," Bauernfreund states. While some investors are more sophisticated and concerned about valuation, there is also a buy the dip mentality. They have begun to search elsewhere in light of the political events in the US.

Europe has benefited greatly, as it appears to be less expensive than the US. According to the Investment Association, after the Liberation Day unrest in May, investors withdrew 622 million from North American funds. In the meantime, inflows into European funds increased to 435 million.

According to recent data, Europe outpaced the US with inflows of 198 million, while North American funds returned to modest inflows of 52 million in June. Value-oriented markets may benefit from growing investor interest, but it will take time to determine whether this turns into a long-term trend.

In a global context, the UK provides good value. According to recent data released by Fidelity International, the FTSE All-Share is trading at 13 times forecast earnings, while the US is trading at 23 times. Manager of Fidelity Special Values Alex Wright asks, "Should the US market trade at a premium to the UK". Given the significantly greater weight of technology, I believe it ought to. However, that disparity seems excessive to me.

Comparing the UK to its own history, it also appears cheap. The FTSE 100 is currently trading at a 10% discount to the average forward price/earnings ratio since 1998, according to Fidelity data. As you proceed down the market-cap spectrum, that discount increases.

Maybe that isn't surprising. Since Brexit, people no longer love the UK. Prior to 2016, institutional investors were having trouble withdrawing funds from the domestic market. In the 1990s, insurers and pension funds held about half of the UK market; today, they only hold 4%.

Returning to Britain, do UK stocks provide good value?

Now, things appear to be getting better. Merchants Trust manager Simon Gergel says, "I think they've pretty much sold all they needed to sell." In addition, policymakers are urging private investors and pension funds to increase their investments in the UK, which may eventually be beneficial. According to Gergel, for the first time in his 35-year career, the government and the regulator are using the same hymn sheet.

The town is also home to some large purchasers. In bargain Britain, foreign private equity firms have been able to shop around and acquire businesses at a reduced price. More of this activity, in Shard's opinion, could "shine a light on the value on offer here." It is obvious that management teams value their own stock as well. In recent years, buyback activity has increased to an all-time high.

Although stock market turnarounds are notoriously hard to predict until they have already occurred, the UK has performed well this year thus far. The FTSE All-Share has increased by over 13 percent. Wright believes that the UK market will not increase its earnings in 2025, in part because currency effects will hurt dollar-earners when they convert their holdings back to sterling.

Opportunities are still available, though. He projects operating profit growth for the companies in his UK equity portfolios to be 6% in 2025, 11% in 2026, and 9% in 2027. We don't really need a rerating to generate very good returns when earnings growth and dividends are this strong.

Where to make investments.

The UK is worthwhile to consider from a regional standpoint. Investing in undervalued businesses across the market-cap spectrum, Fidelity Special Values (LSE: FSV) focuses on UK small and mid-cap firms. According to the annualized share price returns as of June 30, the trust has produced returns of 26%, 15%, and 18% over one, three, and five years.

Over the same time periods, the Invesco UK Opportunities Fund (UK), which has a larger large-cap bias, has produced annualized returns of 13%, 12%, and 16%. For income-seeking value investors, the Merchants Trust (LSE: MRCH) is a solid choice. For the last forty-three years, it has increased its dividend annually and has a five percent yield.

Additionally, the AVI Global Trust (LSE: AGT) appears to be intriguing. It includes a large number of holding companies and conglomerates. Investors are exposed to a wide range of companies through this, frequently at a reduced cost. As an illustration, consider Exor, a major Ferrari owner and an Italian holding company. According to Bauernfreund, "Ferrari accounts for more than half of Exor's value, and Exor is trading at a discount of more than 50% compared with the value of its underlying companies."

Invesco offers exchange-traded funds that offer a variety of geographic exposures to value. For a global value play, there is the FTSE RAFI All World 3000 UCITS ETF (LSE: PSRW); for US value, there is the FTSE RAFI US 1000 UCITS ETF (LSE: PRUS); and for European value, there is the FTSE RAFI Europe UCITS ETF (LSE: PSRE). FTSE RAFI UK 100 UCITS ETF (LSE: PSRU) is the British counterpart. In the meantime, exposure to opportunities in developing economies is provided by the FTSE RAFI Emerging Markets UCITS ETF (LSE: PSRM).