One of the great debates in finance is whether the source of the value premium is risk-based or behavioral-based. Extensive empirical literature on the value premium, which provides support for both explanations, has focused primarily on stock returns and the manner in which they are related to macroeconomic and corporate variables.
Value/Growth Investor Demographics
Sebastien Betermier, Laurent Calvet and Paolo Sodini, who contribute to the literature on this issue with the study “Who Are the Value and Growth Investors?”, published in the February 2017 issue of The Journal of Finance, took a different approach. Their paper investigated value and growth investing among Swedish residents over the period 1999 through 2007.
Following is a summary of their findings:
- Households are not heavily tilted toward stocks in their employment sector. The average direct stockholder allocates 16% of their stock portfolio to professionally similar companies.
- Value investors are substantially older, 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—investors with high human capital and high exposure to macroeconomic risk tilt their portfolios away from value.
- Men, entrepreneurs and educated investors are more likely to invest in growth stocks.
- These 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.
- Over their life cycles, households progressively shift from growth to value investing as they become older and their balance sheets improve, with 60% of the value ladder explained by changes in age, 20% due to changes in the balance sheet and 20% due to changes in human capital.
- Households with high financial wealth, low debt and low background risk tend to invest their wealth aggressively in risky assets and select risky portfolios with a value tilt.
- Households with high current income and high human capital levels tend to tilt their portfolios toward growth stocks. So do households with high income volatility and a self-employed or unemployed head. Further, households with members working in cyclical sectors tend to reduce their portfolios’ value tilts.