If your portfolio has fallen more heavily than you anticipated this year, it may be because it has become biased to growth stocks: a full analysis could help restore the balance—and the exposure to a more disciplined style of value investing—you intended.

After a long period of underperformance relative to growth stocks, value stocks have staged a notable comeback in 2022. But some investors have been less exposed to that comeback than they might have expected, going by the labels on the products in their portfolios.

That long period of underperformance has left core equity indexes very “growth-heavy,” which has in turn led to style drift in many of the supposedly core active strategies benchmarked against those indexes. Even some value strategies have compromised their discipline to avoid lagging too far behind their growth-oriented peers.

It is not too late to rectify these unintended biases, in our view. The first steps are to measure the factor biases of your portfolio and the contributions being made by each underlying strategy. The next step is to assess whether the risk profile revealed is what you want. If it isn’t, the final steps involve rebalancing your existing strategies and, potentially, seeking out and assessing new ones to deliver the exposures you intend.

Executive Summary

  • What are value stocks, what are growth stocks, and why have value stocks staged such a dramatic, long-awaited comeback in 2022?
  • Our analysis suggests that institutional equity portfolios have become more growth-oriented over recent years.
  • This growth bias may often be unintentional: the outperformance of growth stocks has led them to take a bigger and bigger share of core benchmark equity indexes; and even some value strategies have become more growth-oriented in order to avoid lagging performance.
  • We prescribe a six-step solution:
    1. Measure the regime sensitivity of your current portfolio.
    2. Assess each manager’s contribution to that sensitivity.
    3. Is each manager doing what you expect?
    4. Consider reweighting your portfolio to restore or improve balance.
    5. Consider adding new value managers to the mix.
    6. Assess the “flavor” of available value managers carefully, and choose or diversify among them intentionally.

The Portfolio Solutions team at Neuberger Berman helps clients construct portfolios of active and passive investment strategies, with a particular interest in understanding what drives the returns of each strategy or manager (factor/macro tilts or alpha in the case of active managers), and when these drivers contribute and detract from absolute and benchmark-relative returns. Is a strategy biased to a particular factor for example—such as value, growth, quality or momentum? Is it highly exposed to a handful of macro factors—such as an interest rates, a currency pair, economic growth or the performance of a specific sector or region?

Much of our work lately has been focused on the rotation of performance and portfolio flows back to value after a long period in favor of growth. We have been suggesting to our clients that a robust portfolio of active and passive equity managers be balanced in its regime sensitivity, and not too dependent on a single style of investment.

So, what is the value factor and value investing, and why the sudden interest?