International Value vs. Growth: What’s Best for Your Portfolio?
International Funds Offer Value and Growth Opportunities
Growth and value investing are the two most popular approaches to investing in both domestic and international markets. While both funds aim to generate the best possible returns, they take very different approaches to picking stocks. Investors choosing between growth or value funds should carefully consider the differences between each approach to find the best match with their own personal investment goals and objectives.
Value investing is focused on identifying situations where a company’s stock price doesn’t fully reflect its underlying value. For example, a company may have more assets per share than its share price, which means that the company could be liquidated for a profit. Value investors and funds look at a company’s financial statements to determine a fair value and then acquire stock at a discount to the fair value in the hopes that the market will catch on to the mistake.
There are many reasons that a stock may be undervalued. Some companies may experience a short-term rough patch that creates a long-term buying opportunity. Other companies may have undervalued subsidiaries that could be spun out into separate public companies to unlock value. For example, a conglomerate may be valued at 8x earnings but have a tech subsidiary that could be worth 50x earnings if it were spun out.
In general, value investors and funds focus on undervalued opportunities as a ‘margin of safety’ rather than pursuing riskier high growth opportunities. This approach typically produces more current income — or dividends — than growth investments while still offering the potential for long-term capital gains if the market recognizes the true value of the stock. These attributes make value stock arguably the best performing strategy over the long-term.
Growth investing is focused on selecting stocks that will experience above-average growth in revenue, earnings or cash flow. The theory is that faster-growing companies will achieve higher valuations and generate more capital gains potential. And, this has been the case in many technology companies — such as Google and Facebook — that have outperformed the overall market in terms of both revenue growth and stock performance.
The downside of growth investing is that higher-growth stocks are typically riskier and pay less current income — or dividends — since any profits are reinvested. Tech companies like Twitter, for example, have underperformed the market and have generated no value for investors in the form of dividends. These attributes make it important for growth investors to either diversify their holdings and/or carefully select stocks or fund managers.
Growth Vs. Value Investing
|Growth Investing||Value Investing|
|Characteristics||Focus on faster growing companies that tend to trade at higher valuations in the hopes that they can appreciate more quickly.||Focus on undervalued companies that tend to struggle with sales or earnings in hopes the market realizes their potential.|
|Benefits||Potential for faster-growing capital gains.||Potential for capital gains if the market realizes value; margin of safety; and, possible dividends.|
|Risks||Growth may not be realized; valuation multiples may decline; and, they tend to be riskier investments.||Markets may have correctly priced the stock and the intrinsic value may never be realized.|
Best of Both Worlds
Investors looking for a mix of value and growth may want to consider so-called blended funds using Growth at a Reasonable Price (GARP) principles. These funds are focused on capital appreciation, dividend payments, and low valuations, as well as stocks that reinvest their earnings into growth. In essence, these funds focus on reasonably priced stocks that have growth potential rather than undervalued stocks with no growth or overvalued growth stocks.
International Growth and Value Funds
International investors have several options when considering internationally-focused growth and value exchange-traded funds (ETFs) or mutual funds. When choosing between funds, investors can further limit their choices by market capitalization or strategy. Large-cap funds tend to be less risky than small-cap funds in either value or growth classification, while strategies like dividend-focused funds may be attractive to retirees.
The largest international value ETFs include:
- iShares MSCI EAFE Value ETF (EFV)
- iShares International Select Dividend ETF (IDV)
- Schwab Fundamental International Large Company Index (FNDF)
- SPDR S&P International Dividend ETF (DWX)
The largest international growth ETFs include:
- iShares MSCI EAFE Growth ETF (EFG)
- Vanguard International Growth ETF (VWIGX)
- International Growth and Income Trust (BGY)
Investors should carefully consider the expense ratios associated with these funds, as well as turnover and other important features. Much of this information can be found in each fund’s prospectus or on industry analysis websites like ETFdb.com.
The Bottom Line
Growth and value investing are the two most popular approaches to investing in both domestic and international markets. Growth investing focuses on capital gains appreciation while value investing focuses on a margin of safety and dividends. Investors have many options when it comes to international ETFs and mutual funds targeting these strategies, but they should carefully consider the expenses and other features before investing.