Nature vs. nurture, value vs. growth....These are the endless questions of life. I don't have the right data to tackle the nature/nurture argument, but I will try my hand at the value vs. growth discussion.

Which style has rewarded domestic investors the most, even in recent history? The answer is value, and this article quantifies the value premium among all three sizes of domestic equity indexes-large-cap equity indexes, mid-cap equity indexes and small-cap equity indexes—over the 29-year period from 1980 to 2008. So while industry experts might be trumpeting growth as the place to be when the market rebounds, advisors should remember that longer-term, the market values value, at least in passive portfolios.

A BROADER LOOK

First, let's examine the long-term performance of cash, bonds and equities. Over the 29-year period from 1980 to 2008, the S&P 500 returned 10.7% annually with a standard deviation of 18%. An initial investment of $10,000 in 1980 grew to $191,473 by the end of 2008 (not adjusted for taxes or inflation and assuming no additional deposits or withdrawals).

The return of three-month Treasury bills was 6%, with an annualized standard deviation of 3.45%. A similar investment of $10,000 in 1980 grew to $54,187.

The Barclays Capital (formerly Lehman Brothers) Aggregate Bond Index had an 8.9% annualized return with a 7.25% standard deviation. An initial investment of $10,000 in 1980 led to a final account value of $118,117.

SIZE DOESN'T MATTER

Next, let's look at the returns of the six dominant style boxes (large growth, large value, mid-growth, mid-value, small growth and small value). Large-cap funds showed the smallest value premium. The 29-year annualized return of growth-oriented large-cap equity indexes was 8.9% (which represents the average of the Dow Jones Large Growth Index and the DJ Wilshire Large Growth Index), exactly the same return as the Barclays Capital Aggregate Bond Index. By contrast, the two value-oriented large-cap equity indexes in this study returned 11.4%, on average, over the period from 1980 to 2008. In the aggregate, large-cap value generated a 255-basis-point premium over large-cap growth during this 29-year period. This value premium amounted to a differential in the final account value of more than $113,000.

The value premium was higher in the mid-cap sector. The average 29-year return of the two mid-cap value indexes (Dow Jones Mid Value Index and DJ Wilshire Mid Value Index) was 12.5%, considerably better than the 9.7% average return of the combined mid-cap growth indexes (Dow Jones Mid Growth Index and DJ Wilshire Mid Growth Index). Here, the difference in performance amounted to a value premium of over $161,000.

But value really shone in the small-cap arena. Among small-cap equity indexes, the value premium over the 29-year period was an astonishing 452 basis points.

The average of the Dow Jones Small Value Index and the DJ Wilshire Small Value Index outperformed the average of the Dow Jones Small Growth Index and DJ Wilshire Small Growth Index 12.9% to 8.4% With this 29-year annualized return of 12.9%, the small-cap value indexes turned $10,000 into $339,685, or $235,806 more than the ending balance in small-cap growth indexes.

ROLLING ALONG

The data presented so far reflects performance from one point in time (Jan. 1, 1980) to another point in time (Dec. 31, 2008). Clearly, many investors won't invest for that length of time, so it's useful to examine performance by using snapshots of smaller time frames, such as five-year periods (see "Looking Out the Windows," at right).

On the chart, the performance premiums of value indexes and growth indexes are shown in separate columns. The premium (whether growth or value) for each five-year period is shown in basis points.

For instance, over the five-year period from 1980 to 1984, large-cap value equity demonstrated a 432-basis-point premium over large-cap growth equity. Among mid-cap equities during the same period, there was a value premium of 422 basis points. Among small caps, the five-year value premium from 1980 to 1984 was 1,110 basis points.

Considering all 25 five-year rolling periods, large-cap value showed a performance premium 72% of the time. The average five-year value premium was 476 basis points. Conversely, large-cap growth outperformed large-cap value 28% of the time by an average of 353 points.

Among mid-cap equity indexes, value outperformed growth 72% of the time by an average of 575 basis points. When growth outperformed value (again, 28% of the time), the margin of victory averaged 274 basis points. Among mid-caps, a value tilt has historically provided better performance than a growth tilt. However, during the two most recent five-year periods (2003 to 2007 and 2004 to 2008), mid-cap growth beat mid-cap value by 517 and 102 basis points respectively.

Among small-cap equity indexes, value beat growth 76% of the time by an average of 756 basis points. However, when small-cap growth outperforms (24% of the time), the difference can be large. For example, during the five-year period of 1995 to 1999, small-cap growth beat small-cap value by 831 basis points. Overall, however, when small-cap growth outperformed small-cap value, the average margin of victory was 248 basis points.