27four Investment Managers
26th March 2021
Equities duration: much ado about nothing
A rise in yields over the past few months has once again resurrected the debate around the “duration” of equities and its effect on the performance of growth and value stocks.
Duration is a term borrowed from the fixed income space, which simply refers to the sensitivity of bonds to changes in interest rates. Generally, an instrument with a long duration is expected to suffer more than a short duration instrument when interest rates are rising and gain more than a short duration instrument when interest rates are falling.
The sell-off in growth stocks lately has been interpreted in some circles as a confirmation of the commonly held view that growth stocks have a long duration and hence suffer the most from rising rates when compared to value stocks.
A simple correlation test shows that this narrative does not hold water.
In the graph below we regressed changes in the US 10-year treasury constant maturity yield against the difference between value and growth since 2000.
This allowed us to gauge whether there is any meaningful relationship between changes in yields and the growth-value spread. From the graph, we can see that correlations, albeit having increased more recently, are low and sporadic.
This means that value performs in any interest rate environment and the performance difference between value and growth has little to do with yields.
Source: Ishares and the Federal Reserve Bank of St. Louis