How has growth been able to outperform amid both economic strength and the coronavirus crisis and recession?
Growth has been a standout performer during three key market phases in recent years: the multi-year bull market, the pandemic-driven recession earlier this year and the subsequent snapback and market rally. (See the chart below.)
We believe this has to do with a broad migration in quality that has occurred slowly and quietly over the preceding decade. Growth companies have always been defined as those boasting higher earnings growth than their peers. But we have seen that a much broader cohort of these companies, primarily those offering unique solutions, are able to achieve both higher earnings growth and a stronger competitive moat. This is thanks in part to new technological innovation.
Growth has delivered across time
Performance (% return) of selected equity asset classes, Sept. 30, 2020
Source: BlackRock, with data from Bloomberg. Periods ending Sept. 30, 2020. Indexes represented are: MSCI EAFE Index (Global Stocks), Russell 1000 Growth Index (Large Growth), Russell 1000 Value Index (Large Value), Russell 2000 Growth Index (Small Growth), Russell 2000 Value Index (Small Value), Russell Mid Cap Growth Index (Mid Growth), Russell Mid Cap Value Index (Mid Value), Russell 1000 Index (Large Blend), Russell 2000 Index (Small Blend), Russell Mid Cap Index (Mid Blend) and MSCI Emerging Markets Index (EM). Returns shown are annualized for periods of one year and above. Past performance is not a reliable indicator of current or future results. Index returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged. It is not possible to invest directly in an index.
In addition, many growth companies today exhibit capital-lite business models, exemplary free-cash-flow generation, relatively lower leverage and cash-rich balance sheets. All of these ‘quality characteristics’ contributed to growth’s relative degree of protection during the downturn.