Some investors prefer growth and others choose value, just as some diners like meat and others favor fish. But unlike mealtime proteins, growth and value can be difficult to define. Yes, investment professionals should immediately know growth and value strategies when they see them. But in some cases the difference between growth and value has been blurred. How do you benchmark your growth versus value approach?

Possibly, you defer to one of the major index providers. All of them segment many of their market measures into growth and value subindexes. But each index provider uses a different set of criteria to separate growth from value. That means it may not be so easy to tell the meat from the fish.

"There isn't any one precise, scientific, everybody-agrees-on-it definition," concedes John Prestbo, editor and executive director of Dow Jones Indexes. "Everybody's feeling the leg of the elephant and trying to describe what the beast is." And attempts to describe the beast date back about a quarter century.

In the mid-1980s, Russell Investments noticed two broad classes of equities. To determine which category a stock fell into, Russell looked at each company's book value. A security with a high book value relative to its market price was deemed a value stock. Everything else was considered a growth stock.

Rolf Agather, managing director of index research and innovation at Russell, says the book-to-price ratio was fairly good at describing value, but "growth managers complained that it wasn't really a good measure of growth."

So the company added another factor to determine growth stocks. Until recently, the variable Russell used to define growth was analysts' consensus estimate of long-term earnings growth. This year, the long-term growth estimate was replaced by two elements: the consensus estimate of medium-term (two-year) growth and historical five-year sales growth.

VARYING VARIABLES

Other index providers use different variables to separate growth and value. Dow Jones employs six, as does Standard & Poor's, though they don't use all of the same factors. MSCI uses up to eight items in determining style classifications.

"Most people cannot, for the life of them, define growth, but pretty much everyone can define value," says Richard Hoe, a financial planner in Tulsa, Okla., who is in the value camp. "If you can buy something that's worth $1 for 80 cents, then that's good," he says. "The word growth makes me run for cover."

"I think there should be a uniform definition of the two camps," Hoe says, though he adds, "I don't know how you'd get everybody to agree."

Indeed, index providers differ on other essentials, too. "You really need to look under the hood," advises Srikant Dash, managing director at Standard & Poor's Indices. (The companies even disagree on the plural form of the word index. Dow Jones and Russell favor indexes; S&P and MSCI use indices.)

Dash notes that index suppliers have various ways of defining market sectors and capitalization size, observing that the Russell 2000 is a very different universe from the S&P SmallCap 600. He contends that advisors, who may devote a great deal of effort to due diligence before picking active managers, often don't do the same for indexes that they may be using via exchange-traded funds. "You still need to do that onetime research in understanding what an index is and how an index is being defined," Dash adds.

When it comes to defining value, all of the major index providers include the book-to-price ratio or its inverse, price-to-book, as a yardstick. Russell continues to use it as the sole determinant of value.

Other index shops add additional variables, but don't shun book value. "On the value side, you'll see some sort of consistency" among index providers around book value, says Raman Subramanian, executive director for index research at MSCI. "There is no single definition of how you identify growth stocks."

"When you buy a growth index, you're looking for something that is going to predict growth in the future," says Martin J. Gruber, professor emeritus of finance at NYU's Stern School of Business. "It's really very, very difficult."

Historically, value has outperformed growth, except in periods like the late 1990s technology bubble. The sad ending to that episode may be a reason many planners remain skeptical of the growth approach.

Jennifer Cole, a financial planner in Sandia Park, N.M., avoids portfolios that are exclusively growth. "My clients are mostly near-retirees or retirees," she says. Referring to heavy volatility, she says they can't afford "going up by the stairs and down by the elevator." As for finding growth for her clients, Cole notes, "There's enough of it elsewhere," and cites the growth opportunities of broader-based funds.