In the investments world, 2007 will be remembered for the sub-prime meltdown, the final effects of which are still becoming apparent. However, in the equity space, the year was marked by a substantial style shift, which had quite significant consequences for investors.

People who have a clear bias towards value investing feel that they can access better capital preservation characteristics than with growth investing. Buying stocks at a discount to what they’re actually worth stacks the odds in your favour. Investing on the basis of future earnings growth that will eventually pay you back for a high current price seems intuitively optimistic.

Empirical studies have shown that value outperforms growth over the long term, but there are periods during which value underperforms sharply. The most striking example was around the turn of the century, when the internet-bubble saw investors paying incredible prices for earnings growth that they saw as inevitable. As we know, that bubble burst in spectacular fashion and value stocks bounced back quickly. In most of the time since then, value has continued to outperform.

But in 2007 this was not the case. While not as dramatic as the previous dip, the scale of value’s underperformance is noteworthy; in several markets it is more than 20 percent. Only Japanese small-cap growth stocks bucked the trend to beat their value counterparts.

Despite all the turmoil in the latter part of the year, 2007 was positive for equities in general. But value’s underperformance was such that in the US and UK this style actually lost value in 2007, while growth gained. Only in Europe and Asia did value manage to end the year higher. So where does this leave the capital preservation argument?

2007 notwithstanding, some analysts remain convinced that value investing is a safer proposition than growth investing.

Simply stated, growth experiences more negative outcomes, value enjoys a greater proportion of modest positive outcomes and growth has more large positive outcomes. If we were to draw a histogram, the distribution of returns for growth would have “fatter tails” (a greater chance of large up- or down moves), while value’s returns would be more clustered around the mean. Value has a higher median observation than growth. For US mid- and small-caps the pattern is even more exaggerated. In most other major markets it is not quite as pronounced, but the general pattern is similar.