A Growth-Value Approach

Before Richard Bernstein headed up his own money management firm he was head of quantitative research for Merrill Lynch and wrote a great book on style investing: Style Investing: Unique Insight Into Equity Management.

Richard basically took the opportunity to illustrate when the best times were to invest in growth and value styles by detailing the environments in which each style outperforms.

Environments such as earnings and interest rate declines are best for growth stocks while value outperforms when interest rates and payout ratios are increasing.

I started using this research to model portfolios back in 2007 and by 2016 the alpha generated by my Bernstein fundamental models started to evaporate. This happened just as the CAPE ratio started to hit new highs and the value premium died.

Since it might be awhile before valuations come back to earth, momentum offers a better approach to style selection at this time.

Utilizing Momentum with Growth & Value

Just like it’s advisable to use momentum to avoid a value trap, using the Wave-Trend momentum approach to tilt toward growth and value by looking at momentum spread, the Wave-Trend model does provide the following alpha.

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