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Portfolio construction

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Over the last decade, many client portfolios have benefited from significant growth allocations amid a strong bull market and unprecedented quantitative easing. But now many financial professionals are facing a tough choice:
Is it time to shift from growth to value? Growth stocks are typically assessed based on their growth potential while value stocks are often considered to offer value based on lower valuations relative to their perceived worth. It may be time to rethink the growth-versus-value framework.

Trends roadmap

Scroll down for the full insight or click on these sections

Value returns in 2022

Historical style rotations

Sector landscape

Underlying fund flexibility

Investment options

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Value returns in 2022 | Style rotation in bear markets

The growth-led market rally over the last decade appeared to reverse in the first six months of 2022, with value significantly outpacing growth stocks through recent market volatility. There are many reasons to believe that value could be set for sustained strength over time; some value and defensive stocks have tended to hold up better in this stage of the economic cycle. Yet, instead of allocating according to style, we base model portfolio construction on client objectives as well as bottom-up research done by underlying fund managers. Here's why:

Value may be making a comeback in the first half of 2022

Excess returns for Russell 1000 Value Index versus Russell 1000 Growth Index (%)

This chart shows that in the first six months of 2022, the Russell 1000 Value Index had significantly greater excess return over the Russell 1000 Growth Index. The Russell 1000 Value Index finished the six-month period ended June 30, 2022 down 12.86%, outpacing the Russell 1000 Growth Index by 15.21%.

Sources: Capital Group, Factset as of June 30, 2022

“Market volatility brings client goals into focus. We encourage financial professionals to reinforce long-term investment thinking and, when needed, adjust portfolios to bring exposures in line with client objectives.”

 

— Andrew Molinet, portfolio consultant

Historical style rotations | Hard to time

Growth- or value-led market returns over decades

This chart shows annualized 36-month rolling returns for the Russell Growth 1000 and Russell Value 1000 indexes from December 1978 through June 30, 2022. Growth stocks typically outpaced value stocks except for several notable periods in the 80s and early-mid 1990s, and most especially from 2001-2007. The 36-month return for the Russell 1000 Growth Index (ended June 30, 2022) was 11.55% versus 4.39% for the Russell 1000 Value Index.

Sources: Capital Group, Factset as of June 30, 2022

Early signs of a value comeback in the first half of 2022 don’t necessarily mean that investors should shift to value stocks in general, based on top-down assessments of the broader style category and its expected overall behavior in the current environment. The growth-versus-value framework may be far less useful than it might seem. For one thing, style rotations are difficult to predict. Rather than using a growth-versus-value framework when choosing strategies to help pursue investment objectives, we suggest focusing on flexible underlying funds managed by portfolio managers who take an active, bottom-up approach to research.

Sector landscape | Changing more than you may think

Sector weights in growth and value indexes have changed considerably over recent decades. We believe that disruptive forces such as digitization and the growth of intangible assets, including brand, customer loyalty, and research and development, require a bottom-up approach to assessing the intrinsic value of a company. We suggest funds and model portfolios comprised of funds overseen by portfolio managers who focus on long-term, company-specific research regardless of which style is currently in favor.

Changing sector weights in growth and value indexes over decades

This chart shows how sector weightings have changed in the Russell 1000 Value and Russell 1000 Growth indexes from June 30, 1992 to June 30, 2022. Most notably, health-care stocks had a very small weighting in the Russell Value 1000 in 1992 but comprised 17.2% as of June 30, 2022. Another notable change is that information technology stocks jumped from 6.5% of the Russell 1000 Growth Index in 1992 to 43.6% in 2022. Among other top sector weightings in the Russell 1000 Value Index, financials moved from 15.2% to 19.5% over the 20-year period to become the largest sector in the index as of June 30, 2022. Utilities, which was the second-largest sector in the index in 1992 fell to 6% of the index in 2022, while information technology declined from 13.1% to 9%. Industrials dropped from 12.8% over the period to 9.9%. In the Russell 1000 Growth Index, health care, which had the second-largest sector weighting in 1992 at 23.9% of the index fell to 12.3% of the index in 2022, while consumer discretionary remained relatively steady at 15.8% in 1992 versus 15.5% in 2022, and industrials fell from 13.2% to 7.1%.

Sources: Capital Group, Morningstar as of June 30, 2022

“Our growth models remain flexible. While the models are strategic in nature, underlying fund managers continue to respond to the changing market environment in real time via bottom-up investment convictions.”

 

— Stanley Moy, multi-asset investment product manager

Underlying fund flexibility

Allocations in American Funds Growth Model Portfolio

This chart shows American Funds Growth Model portfolio allocations to growth, core (blend) and value stocks from June 2019 to June 2022, according to Morningstar. In the 12 months ended June 30, 2022, growth allocations decreased from 55.9% to 49%, core allocations rose from 30.7% to 39.1%, and value allocations fell from 13.5% to 11.9%.

Source: Morningstar. Morningstar data shown for each style allocation category — growth, core (blend) and value — is the weighted average of Morningstar’s style allocation analysis for each underlying fund in the American Funds Growth Model Portfolio. Morningstar's style analysis can be used to observe how consistent a fund’s style may be over time, although American Funds does not consider consistency of style to be a limiting factor in the way its funds invest. American Funds selects holdings in its mutual funds with the sole purpose of accomplishing a fund’s stated objective rather than adhering to a specific Morningstar style box classification.

This chart shows style allocation changes in our growth model portfolio, based on Morningstar style analysis of underlying funds in the model. According to Morningstar, core (blend) allocations in the American Funds® Growth Model Portfolio have risen considerably in the last 12 months, as of June 30, 2022, while growth allocations have decreased. This is not a result of top-down style allocations. This is a reflection of Capital’s focus on growth as an objective (capital appreciation), rather than growth as an allocation style. Recent changes in this model's core (blend) and growth allocations stem from underlying fund flexibility and our portfolio managers’ ability to seek opportunities outside the growth style category.

Investment options

  • Consider objective-based model portfolios that reflect active investment decisions across underlying funds. This can be especially critical at a time of significant volatility, and market and sector rotations.
  • Focus on the strength and flexibility of underlying funds rather than a growth-versus-value framework. Read more about our approach to all-weather investing across American Funds.

Stay focused on client goals

American Funds models remain committed to their long-term objectives. The Portfolio Solutions Committee (PSC) regularly evaluates strategic allocations in model portfolios and assesses possible reallocations relative to long-term goals. For example, the PSC increased global flexibility in growth models in 2020 and market-cap diversification in 2021. As of June 30, 2022, the PSC decided that existing growth model allocations were appropriate to pursue long-term growth objectives and did not recommend any allocation changes; the team continues to actively monitor allocations.

Examples of objective-based model portfolio construction

This chart shows allocations for American Funds Growth Model Portfolio and American Funds Growth and Income Model Portfolio as of June 30, 2022. American Funds Growth Model Portfolio allocates 80% of total assets to growth funds. This includes a 15% allocation to SMALLCAP World Fund, 10% in The New Economy Fund, 25% in The Growth Fund of America, 10% in New Perspective Fund, and 20% in AMCAP Fund. The remaining 20% is allocated to Fundamental Investors, a growth-and-income fund. American Funds Growth and Income Model Portfolio allocates 15% to growth funds, including an 8% allocation to SMALLCAP World Fund and 7% allocation to The Growth Fund of America. The model allocates 50% to growth-and-income funds, including 20% each to Capital World Growth and Income Fund and The Investment Company of America, and 10% to Washington Mutual Investors Fund. Fifteen percent is allocated to American Funds Balanced Fund, with 10% invested in equity income fund Capital Income Builder. Ten percent is allocated to fixed income, with 5% each in The Bond Fund of America and American Funds Strategic Bond Fund as of June 30, 2022.

Source: Capital Group, as of June 30, 2022

How do your funds compare to American Funds over decades?

USE OUR ANALYSIS TOOL

American Funds® Model Portfolios invest in funds such as The Growth Fund of America®, which aims to achieve its growth-of-capital objective regardless of which style is in favor. Some models also invest in growth-and-income, dividend-oriented funds such as Washington Mutual Investors Fund, depending on model objectives. We offer portfolio consultations to discuss which model or individual investment strategies may best fit your client's long-term goals.

Capital Group offers a wide range of model portfolios, mutual funds, ETFs and separately managed accounts to pursue specific client goals. Here are some examples:

Growth:

The Growth Fund of America

Capital Group Growth ETF

Capital Group U.S. Flexible Growth SMA

Dividend-focused:

Washington Mutual Investors Fund

American Mutual Fund®

Capital Group Dividend Value ETF

Capital Group U.S. Income and Growth SMA

Global growth:

New Perspective Fund®

Capital Group Global Growth Equity ETF

Global dividend:

Capital World Growth and Income Fund®

Capital Group World Dividend Growers SMA

Portfolio Construction Concepts

PORTFOLIO CONSTRUCTION

Where do multi-asset portfolios stand?

PORTFOLIO CONSTRUCTION

Why dividends matter

Are your portfolios built to endure?

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Model portfolios are only available through registered investment advisers. This content is intended for registered investment advisers and their clients.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
Model portfolios are subject to the risks associated with the underlying funds in the model portfolio. Investors should carefully consider investment objectives, risks, fees and expenses of the funds in the model portfolio, which are contained in the fund prospectuses.
The use of derivatives involves a variety of risks, which may be different from, or greater than, the risks associated with investing in traditional securities, such as stocks and bonds.
Lower rated bonds are subject to greater fluctuations in value and risk of loss of income and principal than higher rated bonds.
The return of principal for bond portfolios and for portfolios with significant underlying bond holdings is not guaranteed. Investments are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings.
Frequent and active trading of American Funds Strategic Bond Fund's portfolio securities may occur, which may involve correspondingly greater transaction costs, adversely affecting the results.
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Smaller company stocks entail additional risks, and they can fluctuate in price more than larger company stocks.
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Model portfolios are provided to financial intermediaries who may or may not recommend them to clients. The portfolios consist of an allocation of funds for investors to consider and are not intended to be investment recommendations. The portfolios are asset allocations designed for individuals with different time horizons, investment objectives, and risk profiles. Allocations may change and may not achieve investment objectives. If a cash allocation is not reflected in a model, the intermediary may choose to add one. Capital Group does not have investment discretion or authority over investment allocations in client accounts. Rebalancing approaches may differ depending on where the account is held. Investors should talk to their financial professional for information on other investment alternatives that may be available. In making investment decisions, investors should consider their other assets, income, and investments. Visit capitalgroup.com for current allocations.
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This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.

Russell 1000 Index is a market capitalization-weighted index that represents the top 1,000 stocks in the U.S. equity market by market capitalization.

Russell 1000 Growth Index is a market capitalization-weighted index that represents the large-cap growth segment of the U.S. equity market and includes stocks from the Russell 1000 Index that have higher price-to-book ratios and higher expected growth values.

Russell 1000 Value Index is a market capitalization-weighted index that represents the large-cap value segment of the U.S. equity market and includes stocks from the Russell 1000 Index that have lower price-to-book ratios and lower expected growth values.

These indexes are unmanaged, and their results include reinvested dividends and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.