Who Are the Value and Growth Investors?

• Published date: 01 February 2017
• Author: SEBASTIEN BETERMIER,LAURENT E. CALVET,PAOLO SODINI
• Date: 01 February 2017
• DOI: http://doi.org/10.1111/jofi.12473

THE JOURNAL OF FINANCE •VOL. LXXII, NO. 1 •FEBRUARY 2017

Who Are the Value and Growth Investors?

SEBASTIEN BETERMIER, LAURENT E. CALVET, and PAOLO SODINI∗

ABSTRACT

This paper investigates value and growth investing in a large administrative panel

of Swedish residents. We show that, over the life cycle, households progressively

shift from growth to value as they become older and their balance sheets improve.

Furthermore, investors with high human capital and high exposure to macroeconomic

risk tilt their portfolios away from value. While several behavioral biases seem evident

in the data, the patterns we uncover are overall remarkably consistent with the

portfolio implications of risk-based theories of the value premium.

ACENTRAL QUESTION OF MODERN finance is why value stocks consistently out-

perform growth stocks on average both in the United States and around

the world (Graham and Dodd (1934), Basu (1977), Fama and French (1992,

1998)).1As Fama and French (1992,1995) suggest, the value premium may

be compensation for systematic risks other than market portfolio return risk,

∗Sebastien Betermier is with Desautels Faculty of Management, McGill University. Laurent E.

Calvet is with Department of Finance, EDHEC Business School and CEPR. Paolo Sodini is with

Department of Finance, Stockholm School of Economics, and SHOF. We are grateful to Kenneth

Singleton (the Editor), the Associate Editor, and two anonymous referees for many insightful

comments. Wethank Stephan Jank, Claus Munk, Per ¨

Ostberg, Jonathan Parker,S ´

ebastien Pouget,

Stefan Ruenzi, and Shaojun Zhang for helpful discussions. We also acknowledge constructive

comments from Laurent Barras, John Campbell, Chris Carroll, Luigi Guiso, Marcin Kacperczyk,

Bige Kahraman, Hugues Langlois, Lars Loechster, Anthony Lynch,Alex Michaelides, Ben Ranish,

David Robinson, Nick Roussanov, Johan Walden, Moto Yogo,and seminarparticipants at the City

University of Hong Kong, Copenhagen Business School, HEC Lausanne, HEC Montr´

eal, HEC

Paris, Imperial College Business School, Lund University, McGill University, Peking University,

Sciences Po, the Securities and Exchange Commission, the Swedish School of Economics, the

ToulouseSchool of Economics, Universit ´

e de Sherbrooke, the University of Helsinki, the University

of Southern Denmark, the 2013 Norges Bank Household Finance Workshop, the 2014 IFM2 Math

Finance Days, the 2014 China International Conference in Finance, the 2014 NBER Summer

Institute Asset Pricing Workshop, the 2014 European Conference on Household Finance, the 2015

Cologne Colloquium on Financial Markets, and the 2015 Annual Meeting of the European Finance

Association. We thank Statistics Sweden and the Swedish Twin Registry for providing the data.

The project benefited from excellent research assistance by Nikolay Antonov, Pavels Berezovkis,

Milen Stoyanov, Tomas Th¨

ornqvist, and especially Andrejs Delmans. This material is based upon

work supported by Agence Nationale de la Recherche, the HEC Foundation, Riksbank, the Social

Sciences and Humanities Research Council of Canada, Vinnova, and the Wallander and Hedelius

Foundation. The authors have read the Journal of Finance’s disclosure policy and have no conflicts

of interest to disclose.

1See also Asness, Moskowitz, and Pedersen (2013), Ball (1978), Fama and French (1993,1996,

2012), and Liew and Vassalou (2000).

DOI: 10.1111/jofi.12473

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6The Journal of Finance R

such as fluctuations in aggregate labor income and consumption (Jagannathan

and Wang (1996), Cochrane (1999), Lettau and Ludvigson (2001), Lustig and

van Nieuwerburgh (2005), Petkova and Zhang (2005), Yogo (2006)), cash-flow

risk (Campbell and Vuolteenaho (2004)), costly reversibility of physical capi-

tal (Zhang (2005)), long-run consumption risk (Bansal, Dittmar, and Lundblad

(2005), Hansen, Heaton, and Li (2008), Bansal, Dittmar, and Kiku (2009),

Bansal et al. (2014)), and displacement risk (Garleanu, Kogan, and Panageas

(2012)). Another possible explanation for the underperformance of growth

stocks relative to value stocks is that investors are irrationally exuberant about

the prospects of innovative glamour companies (DeBondt and Thaler (1985),

Lakonishok, Shleifer, and Vishny (1994)).2

The extensive empirical literature on the value premium focuses primarily

on stock returns and how they are related to macroeconomic and corporate

variables. Disentangling theories of the value premium, however, has proven

to be challenging using traditional data sets that do not provide individual

holdings and therefore do not permit researchers to assess the determinants of

investor decisions.3In the present paper, we use the rich information available

in investor portfolios to shed light on competing theoretical explanations. In

particular, we examine value and growth investments in a highly detailed ad-

ministrative panel that contains the disaggregated holdings and socioeconomic

characteristics of all Swedish residents between 1999 and 2007. The data set

reports portfolios at the level of each stock or fund, along with other forms of

wealth, debt, labor income, and employment sector.

The paper makes several contributions to the literature. First, we show that

the value tilt exhibits substantial heterogeneity across households. When we

sort investors by the value tilt of their risky asset portfolios, the difference in

expected returns between the top and bottom deciles is approximately equal to

the value premium.

Second, we relate the value tilt to household characteristics. Value investors

are substantially older, are more likely to be female, have higher financial

and real estate wealth, and have lower leverage, income risk, and human

capital than the average growth investor. By contrast, men, entrepreneurs, and

educated investors are more likely to invest in growth stocks. These baseline

patterns are evident in both stock and mutual fund holdings. The explanatory

power of socioeconomic characteristics is highest for households that invest

directly in at least five companies, a wealthy subgroup that owns the bulk of

aggregate equity and may therefore have the greatest influence on prices.

Third, over the life cycle, households climb the “value ladder,” that is, gradu-

ally shift from growth to value investing as their investment horizons shorten

and their balance sheets and human capital evolve. The life-cycle migration

in the value loading is economically significant, amounting on average to half

the value premium for the stock portfolio and a quarter of the premium for

2We refer the reader to the Internet Appendix for a detailed review of the literature. The

Internet Appendix may be found in the online version of this article.

3See Liu et al. (2015) for a recent discussion.

Who Are the Value and Growth Investors? 7

the risky portfolio, which also includes equity mutual funds. In both cases, we

attribute 60% of the value ladder to changes in age, 20% to changes in the

balance sheet, and 20% to changes in human capital. The value ladder is made

possible by active rebalancing, which allows households to mitigate the impact

of realized returns and revert to their slow-moving target. The relationships

between the value loading and characteristics are also evident in the portfolios

of new participants, which are not passively affected by past returns.

Fourth, we document a strong link between the value loadings of households

and the macroeconomic exposures of their employment sectors. Specifically, we

find that a single macroeconomic factor—per-capita national income growth—

explains on average 88% of the time-series variation of per-capita income in

any given two-digit SIC industry. Households employed in sectors with high

exposure to the macroeconomic factor tend to select portfolios of stocks and

funds with low value loadings. We obtain similar results when we use industry

exposure to the value factor itself as a measure of systematic risk. Furthermore,

we show that cross-sectoral differences in loadings are more pronounced for

young households than for mature households, consistent with the intuition

that human capital risk is primarily borne by the young. As a result, the value

ladder is empirically steeper in more cyclical industries.

In robustness checks, we document that the equities most widely held by

households are a mix of growth stocks and value stocks, and that the rela-

tionships between portfolio tilts and investor characteristics are not driven by

these popular stocks. We further verify that our results are unlikely to be due

to investor experience or stock characteristics other than the value loading,

such as professional proximity, the dividend yield, taxes, firm age, skewness,

and size. As in Calvet and Sodini (2014), we use a subsample of Swedish twins

to control for latent investor fixed effects, such as family background, upbring-

ing, inheritance, or attitudes toward risk. The sensitivities of the value loading

to socioeconomic characteristics are similar in the twin subsample as in the

general household population, regardless of whether the twins communicate

frequently with each other.4

The patterns we uncover appear remarkably consistent with the portfolio

implications of risk-based theories. The strong negative relationship between

a household’s value loading and its macroeconomic exposure provides direct

support for the hedging motive. Households in cyclical sectors go growth, which

reduces their overall exposure to aggregate income risk. To the best of our

knowledge, this paper is the first to find evidence of a hedging demand of any

kind in the risky portfolio of individual investors.

The value ladder provides further validation of the hedging motive. Over

the life cycle, the household becomes less dependent on human capital and its

hedging demand should get progressively weaker, as the model of Lynch and

Tan (2011) suggests. The value ladder should therefore be more pronounced

4We also note that the tilts of twin pairs are highly sensitive to communication, which allows

us to reject Cronqvist, Siegel, and Yu’s (2015) assertion that value investing is driven largely by

genes.