Value Beats Growth in International Equity Funds Over Five Years
Chart of the Week for October 21-October 27, 2005
International equity markets have had strong performance recently as evidenced by the latest quarterly return of 10.4% for the MSCI EAFE Index. Longer-term, results are muted but still positive as shown by the five-year performance numbers above. Taking a deeper look at the returns shows that the performance of international equity funds is not consistent across styles. Value-oriented funds have beaten growth-oriented funds in the past five-year period, following the similar trend in US markets. Value stocks are those that trade at a discount to their fair value. Growth companies are the opposite; their stock sells at high P/E ratios because of high earnings growth with expectations for continued growth.
Just as growth and value styles fall in and out of favor within US markets, international style cycles also occur. This demonstrates the importance of diversification across styles when investing in both US and international equities.
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