Value vs Growth

According to a recent article in Morningstar – I’m vexed!  My investment strategy is value biased.  I recommend investment managers for my client portfolios that purchase shares at a discount and wait patiently until the market discovers their real value and rise.  The value investment approach has been out of favour now for about 10 years.  So what to do?

Since about 2005 a growth investment style out-performs a value style.  A growth style focuses more on various growth factors (revenue, profit etc.)  We are now seeing value investors switching to a growth style – likely because they have lost patience.  Once again investment behavior will be the determinant of investment success or failure.

History tells us when the masses move in the same direction; ensure you move in the opposite.  The chart below is a relative wealth chart and plots the Russell Value index versus the Russell Growth index.  When the line points down, a growth investment style is winning and when it points up, a value investment style wins.  Given what goes down must come up – I’m betting value is poised to recover.

Russell 3000 Value vs Growth

Testamentary Trusts – update

As of January 1st, 2016 most of the tax advantages of a testamentary trust have ended.  However there are still a few useful things a testamentary trust can do.

Testamentary trusts can only be created by a direction in a Will.  These types of trusts allowed estate assets to flow into them and allowed the option for income generated by the assets taxed within the trust at a graduated rate.  So beneficiaries at a higher tax rate could withdraw income from the trust which could be taxed at a lower rate.

As of January 1st, income not paid out to beneficiaries is taxed at the higher rate which exceeds 50%.  There are still situations which make testamentary trusts useful as an estate planning tool.  For example, assets left to children can be directed to a trust managed by a trustee named in the Will who can provide guidance for the children until the age when the deceased directed the assets be handed over to the children.  A trust managed by a responsible trustee can also prevent a spendthrift beneficiary from wasting the assets.

So if you have directed your assets be held in a trust for your children, this may still be a good thing.  The graduated tax rates for testamentary trusts can still be used for up to 3 years after death.  However, if there are no tax advantages or risk of mismanagement of the funds, a testamentary trust may create a layer of complexity not needed.  Testamentary trusts do have tax filing requirements.  I recommend you have your Wills reviewed if you do have a trust clause and determine if any changes are recommended.