St athmore 
U N IVERS I TY 
EMPIRICAL ANALYSIS OF THE VALUE AND GROWTH INVESTMENT 
STYLES IN AN AFRICAN FRONTIER MARKET. 
081092 
MUMBO JAMES DENNIS 
Submitted in partial fulfillment of the requirements for the Degree of 
Bachelor of Business science in Finance at Strathmore University 
Strathmore Institute of Mathematical Sciences 
Strathmore University 
Nairobi, Kenya 
June,2017 
- ---------
DECL;\RATION 
I declare that this work has not been previously submitted and approved for the award of 
a degree by this or any other University. To the best of my knowledge and belief, the 
Research Proposal contains no material previously published or written by another person 
except where due reference is made in the Research Proposal itself. 
© No part of this Research Proposal may be reproduced without the permission of the 
author and Strathmore University 
.fY\Uw.G~!Y.\.~ ... D..6N.t'>!.l5 [Name ofCandidate] 
............................. :-::b ........................... [Signature] 
.......... 2 .7./ J .l..!.. 2-::QJ. £5. ................. [Date] 
This Research Proposal has been submitted for examination with my approval as the 
Supervisor. 
.. ..... M.~.h~r±I ..... Q.hs(m:; .. ..... [Name of Supervisor] 
.. .. ... . .. .... .... /f.T!!P.~ : ..................... ... ..... [Signature] . 
......... ?:J\ .\\.~ .. ~.~..1.± ......................... [Date] 
Strathmore Institute of Mathematical Sciences 
Strathmore University 
.\ckno\\ kdgcmcnts 
Like all journeys in life my journey in this research must come to an end but I would be 
remise ifl did not extend gratitude to all that made this journey a bit more bearable. First 
of all I would like to thank God for the strength, provision and the ability to bring this 
project to completion, My supervisor Mr. Meleah Oleche for the guidance and direction, 
Miss Gillian Kimundi for being a fountain of knowledge and information I could rely on 
and my friends Darshak Bharadva, Jay Ladha, Joseph Theuri and Bob Mani for the 
assistance with the information I needed and anyone else who might have indirectly 
helped in bringing this project to completion. Your efforts did not go unnoticed and may 
God bless you. 
ii 
Contents 
DECLARATION ................. ........ ..... .... .... ...... ...... .... .... .... .... .. .... .. .... .... .. .. .... ....... ............ .. i 
Acknowledgements ... ...... ... ... ........... ... ....... ............................ .. ... .................................... . .ii 
Abbreviations ............ .. ........... .. ........ ..................................... ....... ....... .... .... .. .. ... .. ............. v 
Abstract ..... ..... .... ........ ..... ... ... ...... .. ..... .. .......................... ........... .............................. ..... .... vi 
CHAPTER ONE: INTRODUCTION .......................................... .. .................. ......... ... ... .. 1 
Background ......................................... ................ ...... ... ... ... .......... ..... .... .. ... ...... ................. 1 
Problem Statement ............. .............. .... ... ..................... ....... .. ........... ................................. 4 
Research objectives ........................... .. .... ... ....... .... ..... .. ...... ... ... ...... .... ..... .......................... 5 
Research questions .... .... ... ..... ...... ... ... ............ .. ............ ...................................................... 5 
Significance of the study ........................ .... ....... ..... ... .. .. .. ... ... .. .... ... ... .. ... ............. ........ ...... 5 
CHAPTER TWO: LITERATURE REVIEW ..................................... .... ......... ....... ... ..... .. 6 
Introduction ............... ... ... ... .. ... ....... .. ................................ ....................................... ..... ... .. 6 
Theoretical review .. ... .. .... ... ..... .. ... ..... .. ...... ............. ........ .... ....... ................................ ........ 6 
Conceptual Framework ............... ... .. ......... .. .. ... .... .... ..... ................ ...... : ........................... 12 
Research Gap ........ ....... .. ................. ....................................... ................ .. .......... .... ... ... ... 14 
CHAPTER THREE: RESEARCH METHODOLOGY. .................... .... ..... .. .. ...... ... ...... . 15 
Introduction ... ... ... .... .. ... ... ... ................................................. ..... ... .. .... .... .... .. .. ..... ...... .... ... 15 
Research Design ............... ..... ..... .. .. .. ...... ....................................... ...... ........... .............. ... 15 
Model specification ... ...... ... .. .. .. .............. ........................... .......... .... .. .. ........ ........... ...... ... 15 
Data Collection ........ .. ....... .. ... ...................................... ..... .. .. ........ .... .. ......... .. .. .... .. ...... .... 17 
Population ...... ........... ... .. ... .... ......... .. ........................... ........ .. ......... ... ... ............ .. .... ... ...... 17 
Sampling .......................... ........ ... ..... .... ... ... .. ....... ......... ... ... ..... ........................................ 17 
Data Analysis ........................ .. .......... ... ... ... ... ......... ... .. ... .... ... ... ....................................... 17 
CHAPTER4 DATA ANALYSIS ..... .. ....... ..... ....... ... .. .... ........... .......... ..... .................. .... 19 
iii 
4.1 Introduction ........ ..... ..... ......... ... .................. ....... .......... .... ..... ..... ...... ..... .. .... ... ....... .. ... 19 
4.2 Effectiveness of Style indicators ................. .. ............ ............ ..... .. ... .... .... .. .... ........... . 19 
4.3 Value Investing vs Growth Investing ........ ........ ........ ...... ..... ..... .................... .. .......... 21 
CHAPTER 5. SUMMARY, CONCLUSION AND RECOMMENDATIONS ........ ...... 25 
5.1 Introduction .. .... ........ ... ........ ...... .. .. ..................................... .......... ..... ... .. ........ ... .. .. .... 25 
5.2 Summary .... ......................... .. ... .. .... .... ... .. ................ .. ................................................ 25 
5.3 Conclusion and Recommendations ................................. ... .... .. .. ..... ....... ..... ... .... .... ... 25 
5.4 Limitations ifthe Study ........................... ........... .... .. ..... .. ....... .... ....................... .. ...... 26 
5.5 Recommendations for futther study .............. .. ............. ... .... .... .. ... ... ..... ..... .... .. .... .... .. 26 
REFERENCES ............................................... ..... ... ...... ... .. .... .... .... ............. ............... ...... 27 
Appendices ....................... .................... ... ......... .. ........................ ..................................... 29 
Appendix 1 Growth Portfolios ............. ... ... .. ....... .. ... ....................................................... 29 
Appendix 2 Value Portfolio .. ... ..... ..... ........................ ............ ...... .... ...... ...... .... ........ ... .... 31 
iv 
AbbrcYiations 
P&L- Profit and loss 
R&D- Research and development 
PIE- Price to earnings ratio 
PIB- Price to book ratio 
FCF- Free Cash flow 
NSE- Nairobi Securities Exchange 
MSCI- Morgan Stanley Capital International 
HPR- Holding period return 
EPS-Earnings per share 
v 
Abstract 
The choice of a stock is a headache for all equity investors worldwide ranging from well 
developed markets to developing markets. This study embarks on testing the Growth and 
Value investment styles in an African frontier market namely the Nairobi securities 
exchange and discovers is that the Value investment style does overall outperform the 
Growth investment style on the basis of portfolio return and Sharpe however there are 
instances when the Growth investment style does outperform the Growth investment style 
in the case of this study the results of 2007 are evidence. 
Key words: Equity investment style, Growth investing, Value investments 
vi 
CHAPTER ONE: INTRODUCTION 
Background 
Stock markets have become a good way to boost economic growth. Naik & Padhi (2015) 
found out that stock market development significantly contributes to economic growth as 
it allows for investors to use their excess incomes to earn returns from capital gains or 
dividends. This brings about a need for investors to know which stocks to invest in in 
order to gain returns. 
In an attempt by investors to. find stocks to invest in, equity investment styles have been 
developed in selecting stocks. The styles have been developed so as to provide a 
framework for investing in equity markets which in tum keeps investors from investing 
on a whim which is very susceptible to biases as Otuteye & Siddiquee (20 15) explain 
"Investment decisions are subject to error due to cognitive biases of the decision makers. 
One method for preventing cognitive biases from influencing decisions is to specify the 
algorithm for the decision in advance and to apply it dispassionately." Two investment 
styles explored in this study are the value and growth equity investment styles 
Value investing is the phenomenon in which securities that appear cheap, on average 
outperform securities that appear to be expensive. The value premium is the return 
achieved by buying (being long in an absolute sense or overweight relative to a 
benchmark) cheap assets and selling (shm1ing or underweighting) expensive ones 
(Asness et al, 20 15). 
Value investing is a method that has been empirically tested in the worldwide markets to 
prove the existence of the value phenomenon. Naik & Padhi (2015) state that the 
existence of the value premium is a well-established empirical fact. It is evident in 87 
years of U.S. equity data, in more than 30 years of out of-sample evidence from original 
studies, in 40 other countries, in more than a dozen other asset classes Asness, Moskowitz, 
and Pedersen (2013), and even dating back to Victorian England. 
1 
r 
I 
Value investing as a style is usually recognized using key style indicators or factors that 
are discussed below. These style indicators are used to carry out the value investing 
strategy and they include; Price to earnings yield, price to book ratio and the dividend 
yield. According to Reilly & Brown (2012) value stocks are those that appear to be 
undervalued for reasons other than earnings growth potential. Value stocks are usually 
identified by analysts as having low price-earnings ratios. 
Jensen (2014) explains that the P/B ratio enables investors to compare the amount that 
the company has raised from shareholders and reinvested on their behalf with the total 
market value of the firm's shares, thereby indicating investors' willingness to pay for the 
rights to the future growth and earnings of the company. Conversely, value investors 
search for companies that are undervalued relative to book value and they thus invest in 
companies with low P/B. 
The dividend yield factor, is well aligned with the contrarian strategies of value investors. 
Jensen (2014), explains the rationale for intuitively, paying large dividends is a strong 
signal to investors that the fi1m is not planning on using its cash for immediate or future 
growth. Thus, companies with high dividend yield are considered value stocks. The 
reverse holds for little or non-dividend paying firms with high plowback ratios in order 
to reinvest earnings back into the business to finance further growth initiatives. Thus, the 
dividend yield factor can be seen as a proxy, along with the PIE and P/B and for the 
markets' expectations of future performance and growth. 
Growth investing on the other hand as described by Reilly & Brown (2012), is an 
investment style and investment strategy that is focused on the growth of an investor's 
capital. The growth strategy is measured by the following factors: asset growth, growth 
in earnings per share (EPS growth), High price to earnings yield and a composite factor 
combining the three ratios. Growth investors as Jensen (20 14) describes are investors who 
seek out stocks which they believe have the ability to outgrow the market. Contrary to 
value investing, which focus on observed facts, growth investors focus on the future 
prospects of a company by extrapolating past growth patterns into the future. 
2 
The growth strategy is measured by the following factors: net asset growth and growth in 
earnings per share (EPS growth), and High price to earnings ratio. This approach 
examines the stock performance based on prior growth results, and not expected growth, 
which is captured by the value factors presented above. As a result growth investors target 
stocks with high price to earnings yield. 
The net asset growth factor captures the effect of a firm's total investment and fmancing 
activities, such as capital expenditure, acquisitions and divestitures and transactions with 
shareholders with growth investors targeting companies with high net asset growth, Thus, 
this study will be able to evaluate whether large increases in total assets is an attractive 
property for investors by looking at returns from a pure net asset growth strategy. 
Frontier markets can be defined as markets in developing countries. "These markets 
represent developing countries with high rates of economic growth, but small and 
relatively illiquid stock markets"Knapp & Mansharamani (2013) define frontier markets 
as any country that has a stock exchange open to foreign investors and is weighted at less 
than 1% in the Morgan Stanley Capital International Emerging Markets Index. In 
aggregate, such countries represent 20% of the world's population, 10% of global GDP, 
and approximately 2% of the world's market capitalization. A good example is the 
Nairobi securities exchange which will be used as a proxy for other African frontier 
markets but by no means the standard due to the various differences in the various African 
Frontier markets ranging from legislations to Political structure. 
Hargreaves (2017) points out that Frontier Market Asset Management's Lany Speidell 
and Andrea Clark use value investing in frontier markets and have come across 
companies that tick all the boxes for them in their Frontier Market Select Fund, a good 
example is Jordaniar1 shisha tobacco supplier Al-Iqbal. The company's earnings per share 
was expected to grow by 15% to 20% going forward. The firm pays out around 90% in 
earnings to shareholders via dividends and shar·es traded at a Price to earnings of 18% 
and yield 6% which in tum led to gains as the stock price increased, showing that the 
value investing premium exists in frontier markets, this paper finds out the empirical 
extent using the Nairobi Securities exchange as a proxy 
3 
The choice of the NSE as a proxy is based on 2013 MSCI findings "The Nairobi Securities 
Exchange (NSE) closed the year as the top performing African market on the global 
MSCI Index, putting Kenya on the radar for intemational investors who have an appetite 
for risk exposure in frontier markets. "Also as per the 2017 MSCI Frontier markets index 
Safari com Limited a constituent of the NSE was ranked as the top constituent in Africa. 
Therefore the NSE is an appropriate proxy for frontier markets in this study. 
Problem Statement 
Value investing has been compared to growth investing and has come up with better 
retums on average and less volatility compared to growth investing. Reilly & Brown 
(2012) explain that in the United States markets value based investing portfolios produce 
better retums on average. During this analysis, the spread ranged from almost 20 percent 
in favor of value investing an advantage over the growth style. However Jensen (2014) 
found that the asset growth factor which is a growth based investing factor is found to 
have larger predictive power than other value investing factors such as P/E, PIB which 
begs the question as to whether the value investing style consistently brings about better 
retums than the growth based investment style. Conversely, their study illustrates that 
the spread between value and growth retum standard deviations, itself is volatile, and is 
consistently negative, meaning that the growth strategy is consistently riskier than the 
value approach. However Chan and Chen (1991) and Fama and French (1992) noted that 
ce1iain value investing factors such as the low book value to market equity price could 
signal greater risk, In their view firms trading cheaply relative to their book value of 
equity are likely to suffer from financial distress as well as a higher cost of capital due to 
increased risk. Which brings about a controversy as to whether value investing is really 
less risky compared to growth based investing. Therefore there is still need to test the two 
styles of investing to establish their performance against each other in a Frontier market 
which this study does using the NSE as a proxy for frontier markets. 
4 
Research objccti\·cs 
1) To determine the predictive power of the value and growth based investing factors . 
2) To determine the perf01mance of the value investment style against growth investment 
style in a frontier market in terms of retums and risks. 
Research questions 
1) How well do the value and growth based investing factors predict value? 
2) Does the value investing strategy bring about higher retums and lesser risk than the 
growth investment style? 
Significance ofthe study 
The study to finds out how well the style indicators predict value and how value investing 
performs against growth based investing in a frontier market. It contributes by pointing 
out how value investing and growth based investing as investment styles perform in a 
frontier market (Nairobi Securities Exchange) and forms a basis for other frontier markets 
in Africa. This study also contributes to investor and academic education in countries that 
have frontier markets and are investigating the value and growth based investment style. 
It also benefits researchers in the field of equity portfolio management strategies and 
investors who are looking to invest in frontier markets using the value and growth 
investment styles. 
5 
CHAPTF: R T'vVO: LITERATURE REVIE\V 
Introduction 
This section gives a summary ofliterature on the value investing and growth investing. It 
is divided into two sections: The first section contains findings on how well the various 
style indicators predict value and their benefits and weaknesses. The second section 
compares the performance of the value and growth investment styles. 
Theoretical revic\\. 
The price to earnings ratio is considered an essential tool in the valuation of stocks as 
Reilly and Brown explain that it is the best-known measure of relative value for common 
stock is the price/earnings ratio or the earnings multiplier because it is derived from the 
dividend growth model and has stood the test of time as a useful measure of relative value 
(Reilly & Brown, 2012). 
Basu (1977) studied the existence of value premium in US market from 1957 to 1971 and 
found that on an average, both on absolute and risk-adjusted basis, the securities with low 
PIE ratios delivered significantly higher returns than high PIE securities. Jensen (2014), 
states that Earnings appear to be a strong indicator of the fundamental value of companies, 
and as such, investing in companies priced too low relative to their realized earnings has 
been a profitable strategy for investors. However the strategy of investing using the price 
to earnings ratio has been met with some criticisms. 
Critics of the PIE approach claim that the ratio is easily affected by non-systemic factors 
such as variations in institutional depreciation and amortization rules, differences in 
accounting principles, large one off items on the Profit and Loss and temporarily 
depressed earnings. For example, phannaceutical companies with large Research and 
Development spending can choose to book their research on the balance sheet, which 
increases share capital, or they can expense the R&D costs on the P&L, thereby affecting 
earmngs. 
6 
Various researchers have embarked on testing whether the price to eamings ratio is a 
good predictor of value, Jensen (2014) conducted research on the value and Growth based 
style indicators in United States and European markets and his findings on the price to 
eamings ratio were that an examination of the premium within the underlying markets 
shows that the PIE factor premium is largely non-existent in the US market from 1990-
2013 . While this finding is supported by the findings of Fama and French (20 11) it is a 
sharp contrast to previous academic results from Basu (1977) and Lakonishok, Shleifer 
and Vishny (1994) who show that the premium has been higher in the past. As such, the 
premium does not appear stable over time. Therefore its ability to predict value is still 
unclear and wan·ants testing especially in a frontier market 
The price-to-book-value ratio (P/B) has gained prominence because of the studies by 
several authors, the rationale is that book value can be a reasonable measure of value for 
firms that have consistent accounting practice for example, firms in the same industry 
notably, and this measure can apply to fitms with negative earnings or negative cash 
flows. (Reilly & Brown, 2012).Despite its prominence it has been faced with criticisms 
as explained below. 
The price to book ratio is not effective when comparing firms with different levels of 
assets as Reilly & Brown (2012), explain "You should not attempt to use this ratio to 
compare firms With different levels of hard assets, for example, a heavy industrial firm to 
a service firm." Secondly, Chan and Chen (1991) and Fama and French (1992). In their 
view, firms trading cheaply relative to their book value of equity are likely to suffer from 
financial distress as well as a higher cost of capital due to increased risk. 
Thirdly, Jensen mentions that investors should seek to accumulate sufficient knowledge 
about the company in order to eliminate the risk of investing in a potentially distressed 
company which shows that the use of the price to book ratio requires combination with 
other value factors when attempting to use it as a predictor of value. The inherent risk of 
the P/B factor can to some degree be mitigated by applying composite ratios however 
Jensen's study concluded that the data presented in for the developed markets do not 
indicate any significant benefits from following a naive low P/B strategy, and that the 
P/B premium in the sample is significantly lower than previously, suggesting that the 
7 
premium is not stable over time. Which begs the question of whether there is a premium 
gained from investing using a price to book ratio approach in a frontier market. 
Fomthly another criticism of the Price to book ratio is its reliance on monetary policy as 
discussed by Johnson, Jensen & Mercer (1997), Firm size and price-to-book-value ratio 
are prominent measures in explaining cross-sectional stock returns. Historically, average 
returns on shares of small-capitalization firms and low price-to-book firms have exceeded 
those on large-capitalization firms and high price-to-book firms. Recent evidence also 
shows that monetary policy developments significantly explain security returns. When 
we considered the influence on stock retmns of the Federal Reserve's policy stance, we 
found that size and price-to-book effects depend largely on the monetary environment. 
Specifically, the small-firm and low price-to-book premiums are economically and 
statistically significant only in expansive monetary policy periods and are small, and in 
some instances negative, in restrictive policy periods. This evidence suggests that 
investors should consider the Fed's policy stance when using strategies that rely on size 
or price-to-book ratio 
Value investors look for stocks with high dividend yield as a stock with high yield is 
relatively cheap especially when it also has a low price to earnings ratio as well. Reilly & 
Brown (20 12) ''Notice that value stocks are defined as those that are relatively cheap (e.g., 
low PIB, high yield)" Despite its intuitive appeal, the dividend yield factor has some 
inherent disadvantages. First, the flow of funds between a company and its shareholders 
is not limited to dividends and share capital increases, as firms also have the option of 
share repurchases, thereby paying an indirect dividend by decreasing the amount of 
outstanding shares with claims on the firm's earnings. While the two approaches are not 
completely similar, they both capture the effect. As such, one may wrongly classify a 
company as a growth firm despite large capital outflows from the company to its 
shareholders. 
Regardless of the disadvantage the dividend yield is still a strong indicator for value 
investors as pointed out by a study from Jensen (2014), The excess return of the high 
dividend yield basket and the premium appear stable relative to their excess return. As 
such, the premium yields the second highest return risk ratio of all non-composite factors. 
8 
In other words, the dividend yield premium yields attractive returns to investors without 
increased total risk. But will this be the case for frontier markets. 
From the findings it can be deduced that the value factors bring about minimal premiums 
in United States and Emopean markets this paper will therefore find out if this is the same 
for a frontier market such as the Nairobi securities exchange. 
The growth style indicators (asset growth and growth in earnings per share) performance 
is discussed. The asset growth factor is found to have larger predictive power than other 
variables such as PIE, P/B. The empirical data indicates however, a negative relationship 
between asset growth and investor returns. 
For the EPS growth the results presented indicates a non-existent premium of 0.02% 
which is highly insignificant. Investors would do well to avoid both companies with high 
or low EPS growth. However, the differences between baskets appear volatile and no 
reliable conclusion can be reached at this point. 
In conclusion the predictive power of the style indicators appear to be stronger in the tests 
done in 1957 to 1971 but however the tests of 1990 to 2013 almost tempt the conclusion 
that investors should not rely on these factors while investing in the USA and European 
markets however what will be the outcome in a frontier market. With the conclusions of 
the factors individually showing limited predictive power value various researchers have 
tested the ability of the factors to predict value when combined in their value and growth 
based investing styles. 
With regard to the comparison of the growth and value investing most of the Academic 
community conclude that Value investing produces better return than Growth investing 
with international evidence suppmting it as explained by Fama & French (1998), Value 
stocks have higher returns than growth stocks in markets around the world. For the period 
1975 through 1995, the difference between the average returns on global portfolios of 
high and low book-to-market stocks is 7.68 percent per year, and value stocks outperform 
growth stocks in twelve of thirteen major markets. 
Sharpe, Rowley and Capaul (1998), further support Fama & French (1998) by stating 
value stocks outperformed growth stocks on average in each country during the period 
studied both absolutely and after adjustment of risk.Cross cwTently correlations of 
9 
monthly value-growth spreads were small suggesting that any decision to tilt a portfolio 
toward a value stocks portfolio would have been more effective if done globally. 
Louis K. C. Chan and JosefLakonishok (2004) conclude that based on the accumulated 
weight of evidence on the book to market and related anomalies, the academic community 
has generally come to agree that value investment strategies, on average outperform 
growth investment strategies . 
Reilly & Brown (20 12) pit growth based investing and value based investing against each 
other and present findings from Fidelity Management in the Rotation charts below. They 
show a comparison of returns and volatilities of value and growth based portfolios 
PERFORMANCE VALUE AND GROWTH PORTFOLIOS: 1979-1999 
A. Rotation of Yaluc a nd Growth Rctums 
25.0 
-- 20.0 .= 
~ 15.0 I:! 
Higher Value Stock Returns 
9 10.0 g 
~ 5.0 
> 
~ 0.0 0 
c: 
-5.0 .... 
-
25.0 
20.0 
15.0 
10.0 
5.0 
0.0 
-5.0 
() 
- 10.0 Cl: -10.0 
"2 -15.0 -15.0 
.~ 
~ -20.0 -20.0 
c: 
c: 
-25.0 
<( 
Higher Growth Stock Returns 
-25.0 
-30.0 -30.0 
1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 
10 
B. Rota tion of \ ·"a luc and ; .-owth la ndar·d Dni :~ ti o n 
10.0 10.0 
-.&; 
- 8.0 ;: 8.0 
e 
<!} 6.0 6.0 
J, 
~ 4.0 
> 
4.0 
Higher Value Volatil ity 
0~ 2.0 2.0 
~ 0.0 0.0 
12 
-2.0 0 -2.0 
> , 
--4.0 --4.0 
(j) 
.t:l 
-6.0 ~ -6.0 
c 
-8.0 c 
~ 
-8.0 Higher Growth Volatility 
-1 0.0 - 10.0 
1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 
Source: Fidcli t, . lanagcmem and Research. Data based on rcl:~tive ro ll ing 12-m nth returns to Russel 1000 Value and 
Growth index . 
In the United States market value based investing portfolios produce better returns on 
average however this is not always consistent from one investment period to another as 
Reilly & Brown (2012) explain "It is tempting to conclude that value is unambiguously 
superior to growth as an investment style. However, it is important to note that, although 
value investing produces higher average returns than growth investing, this does not occur 
with much consistency from one investment period to another. In fact, Panel A of Exhibit 
17.16 shows that there are significant differences in the value-growth return spread (based 
on the rolling annual performance of the Russell 1 000 Value and Growth indexes) over 
time. During this analysis, the spread ranged from almost 20 percent in favor of value 
investing to almost 20 percent to the advantage of the growth style. Conversely, Panel B 
of the exhibit illustrates that the spread between value and growth return standard 
deviations, while itself volatile, and is consistently negative, meaning that the growth 
strategy is consistently riskier than the value approach." 
11 
Conceptual Framework 
From theoretical review it can be determined that the value investing and growth 
investment styles have distinct factors that identify each style. A value investing style 
portfolio is composed of stocks with low price to earnings yield, low price to book ratio 
and high dividend yield. 
Whereas a growth based investing portfolio is made up of high EPS and high net asset 
growth. 
12 
High net 
asset 
growth 
The following procedure is used in analysis, first to detennine the predictive power of the 
style indicators is achieved by constructing portfolios based on the key style indicators of 
value and growth investing (Low PIE, Low P/B ratio, High dividend yield, High EPS 
growth, High PIE and High net asset growth) then measure the performance of these 
portfolios by calculating the return of the portfolios yearly from 2007 to the end of 2016. 
Ranks are awarded to portfolios based on the Sharpe ratios whereby the portfolio with 
the highest Sharpe ratio being considered as the best performer as it maximizes an 
investor's retUrn with respect to the risk represented by the portfolio volatility. 
To determine the performance of the value investment style against growth investment 
style in a frontier market. This is done by constructing portfolios based on value investing 
style indicators (Low PIE ratio, Low P/B ratio, High dividend yield and High free cash 
flow yield) combined then compared to portfolios formed through growth based investing 
indicators (High net asset growth, High EPS growth and High P/E ratio) combined. The 
growth based and value based portfolios are compared by comparing returns from 2007 
to the end of20 16. The study also looks at the risk and return characteristics by calculating 
the Sharpe ratio. 
13 
Research Cap 
The predictive power of the style indicators appear to be stronger in the tests done in 1957 
to 1971 but however the tests of 1990 to 2013 almost tempt the conclusion that investors 
should not rely on these factors while investing in the USA and European markets 
however what will be the outcome in a frontier market. Louis K. C. Chan and Josef 
Lakonishok (2004) conclude that based on the accumulated weight of evidence on the 
book to market and related anomalies, the academic community has generally come to 
agree that value investment strategies, on average outperform growth investment 
strategies. However, it is impmiant to note that, although value investing produces higher 
average returns than growth investing, this does not occur with much consistency from 
one investment period to another. Therefore with no definitive answer this study tests the 
performances in a frontier market as the conclusions concerning the growth and value 
investing styles are based on more developed markets therefore does not take into account 
that frontier markets have relatively illiquid markets. 
14 
CHAPTER THREE: RESEARCH METfiODOLOGY 
Introduction 
This section presents the methodology used to attain the objectives of this study. It is 
organized as follows: The next section describes the research design. The third section 
shows the conceptual framework adopted in this study, then finally the last section 
highlights the data type and sources and the procedure carried out for data analysis 
Research Design 
This study is a descriptive study as it aims to describe the cunent state of the value and 
growth based investing styles in frontier markets by constructing pmifolios using the key 
style indicators individually and combined, then measuring their performance. 
Model spcci []cation 
The return of individual stock is calculated using a buy and hold strategy until the next 
portfolio formation using the Holding period return formula calculated annually. 
Dividend+ (Ending price- Beginning price) 
HPR = B . . . 
egmmngpnce 
Where 
HPR=Holding period return 
Dividend= Dividend paid within the holding period 
Ending price= Stock price at the end of the year 
Beginning price=Stock price at the beginning of the year 
15 
To calculate the retums of the portfolio we will use the mean variance analysis of an n-
asset portfolio 
To determine the return of the portfolio 
n 
Rp =I Wi(Ri) 
Where 
Rp =expected return of the portfolio 
Wi-Asset weight 
Ri = Holding period Return of stock 
n=number of stocks 
And the volatility 
i=l 
n n n 
CJ(rp) = I wi2CJ2(ri) + I I 2wiwjcov(ri, rj) 
i=l i=l j=i+l 
Where 
Wi and Tfj =weights of the assets 
Ri and Rj = returns of the assets 
Cov =covariance 
In ord~r to rank the portfolios and the study will measure the Sharpe ratios calculated as 
follows 
Rp- Rf 
Sl1larpe ratio = ---CJ 
16 
Where 
Rp=Return of the pmifolio 
Rf =Risk free rate 
a = Volatility of the pmifolio 
Whereby the portfolio with the highest Sharpe ratio being the best performing as it 
maximizes return with respect to the risk of the portfolio. 
Data Co llection 
Secondary time series data of stock prices ranging from the year 2007 to 2016 is used in 
this study from the NSE website also the study makes use of financial statement items 
from respective company websites to calculate the various style indicators. 
Population 
This study will examine 64 listed companies in the Nairobi securities exchange using 
their stock prices and financial statement items ranging from 2007 to 2016. 
Sampling 
The sampling method is random sampling with the constraint that three quarters of each 
sector is selected. 
Data Anal ysis 
One objective of this study is to determine the empirical relationship between common 
stocks and the style indicators. This study achieves this by constructing portfolios based 
on the key style indicators of value investing and growth investing (Low PIE ratio, Low 
PIB ratio, High dividend yield, High PIE ratio, High EPS growth and High net asset 
growth) then measuring the performance of these portfolios by calculating the holding 
period returns of the portfolios annually ranging from 2007 to the end of2016.This shows 
which factors individually are good predictors of value. 
17 
The second objective of this study is to determine the performance of the value investment 
style against growth investment style in a frontier market. This is done by constructing 
portfolios based on a combination of all value investing style indicators (Low P/E ratio, 
Low P/B ratio and High dividend yield) then compared to pmifolios formed through a 
combination of growth based investing indicators (High net asset growth, High EPS 
growth and High PIE ratio). The growth based and value based pmifolios will be 
compared by comparing returns annually from 2007 to the end of 2016. In addition 
rankings are also awarded to the portfolios by calculating the Sharpe ratio whereby a 
higher Sharpe ratio means a better performance of the pmifolio. 
18 
Cl I APTER -1- DATA ANALYSIS 
-1-.1 Introduction 
This section is divided into two sections the first section presenting the effectiveness of 
the value and growth investment indicators in predicting higher returns (Value) which is 
judged by Holding period returns from 2007 to 2016.The second section presents the 
performance between the value and the growth investment styles which is be judged 
based on the portfolio returns and Sharpe ratios fi·om 2007 to 2016 
4.2 Effectiveness of Style indicators 
This section shows the yearly and total Holding Period returns for an investor pursuing 
an investment strategy with the various style indicators. 
The information is summarized in the table below. 
19 
Year Low PIE LowP/B High High PIE High net High EPS 
Dividend asset growth growth 
Yield 
2007 --5.41 -5.9801 -2.39888 -3 .05044 -0.55483 -3 .69753 
2008 -4.32 -4.2852 -4.58811 -5.82141 -1.12833 -0.59279 
2009 3.79 8.82727 9.42 8.501238 2.323687 8.058866 
2010 4.98 7.37289 2.64 7.063418 3.412149 10.16779 
2011 -3.55 -5.744 0.79 -4.80762 -3.63107 -0.79804 
2012 -2.13 10.6972 3.92 2.370964 14.10614 9.205135 
2013 14.961 3.60 5.503137 8.728566 10.84501 
12.29 
2014 6.74859444 6.16999 1.99 2.205614 5.715279 7.157048 
2015 -6.864753 -5.568 2.22 -2.04041 -0.99279 -1.52636 
2016 198.328152 -31.383 42.92339 -310.854 -317.758 19.30812 
Mean 21.46819934 -0.493195 6.05164 -30.0929509 -28.9779199 5.8127249 
Volatility 62.42610468 13.37157665 13.48474167 98.77457866 101.6057616 7.255778725 
20 
The results show that a Low PIE yield strategy should overall produce the highest returns 
compared to the other style indicators. Suppmting the works of Reilly & Brown (20 12), 
who state that the price to earnings ratio is considered an essential tool in the valuation of 
stocks as it is the best-known measure of relative value for common stock because it is 
derived from the dividend growth model and has stood the test of time as a useful measure 
of relative value, However it must be mentioned that a high return in 2016 is the main 
cause for the large spread of retums hence a low PIE strategy does not really guarantee 
high retums hence this strategy should be applied with consideration of other factors both 
macro and specific to the company before selecting it as a part of the portfolio. The higher 
retum is also at the cost of a high volatility compared to the High dividend yield style 
with relatively high retUm and lower volatility. 
This study also is a contradiction of Jensen (2014), who found that the net asset growth 
factor which is a growth based investing factor is found to have larger predictive power 
than other value investing factors such as PIE, PIB 
Conversely the largest losses are produced by a high price to eamings yield strategy and 
followed closely by the high net asset growth strategy and both have considerably high 
volatilities however once again the 2016 returns are the main cause for the drastic losses 
and high volatility hence really implying that when one is choosing a style of investment 
the investor should be cautious when constructing portfolios because applying these 
investment styles dispassionately could evidently sometimes not be rewarding for the 
investor. 
4.3 Value lm·esting \ 'S Gro\\ih Investing 
The second objective of this study was to compare the performance ofthe Value investing 
strategy against the Growth investment style in the NSE. 
The table below summarizes the portfolio returns of the Growth and value portfolios 
together with their respective volatilities and Sharpe ratios. 
21 
Performance Measure 2007 
GROWTH VALUE 
Portfolio Retum 0.385678 -0.65854 
Sharpe ratio 836.0853 -0.8321 
standard deviation 0.000379 0.873973 
2008 
Portfolio Retum -0.00285 -0.42422 
Sharpe ratio -1.08443 -1.63809 
standard deviation 0.081837 0.31141 
2009 
Portfolio Retum 0.333124 0.57709 
Sharpe ratio 0.839354 1.018363 
standard deviation 0.315628 0.499714 
Performance Measure GROWTH VALUE 
2010 
Portfolio Retum 0.245787 1.242465 
Sharpe ratio 1.712931 1.332131 
standard deviation 0.130179 0.868207 
2011 
Portfolio Retum NIA -0.08417 
Sharpe ratio -1.00209 
standard deviation 0.266616 
22 
GROWTH VALUE 
Performance measme 2012 
Portfolio Return 0.537308 N/A 
Sharpe ratio 1.339034 
standard deviation 0.339281 
2013 
.~ 
Portfolio RPtnrn _() ')() 1 QQ 1 ')QLI.7"t:.: 
Sharpe ratio -0.61333 1.122353 
standard deviation 0.484374 2.841847 
2014 
Portfolio Return 0.131905 NIA 
Sharpe ratio 0.103606 
standard deviation 0.445003 
2015 
Portfolio Return -0.15147 1.787608 
Sharpe ratio -0.93444 1.256421 
standard deviation 0.267077 1.344699 
2016 
Portfolio Return NIA 5.780537 
Sharpe ratio 1.071438 
standard deviation 5.337627 
23 
From the results above there is the confirmation of what the Academics worldwide agree 
on, which is that the Value investment style does overall outperfmm the Growth 
investment style on the basis of portfolio retmn and Sharpe ratios however there are 
instances when the Growth investment style does outperform the Growth investment style 
in the case of this study the results of 2007 are evidence. 
This echoes the works of Reilly & Brown (2012) who state that in the United States 
markets value based investing portfolios produce better retums on average. 
The results of this study also a contradiction of the work ofReilly & Brown (2012), whose 
study illustrates that the spread between value and growth retum standard deviations, 
itself is volatile, and is consistently negative, meaning that the growth strategy is 
consistently riskier than be4cause in this study the volatilities are higher for the value 
investment portfolio evidenced by the results above. 
The actual portfolio constituents of each investment style including the weights allotted 
to each stock can be found in appendix 1. 
The stocks that were chosen were on the basis of the company' s style factors , for the 
growth portfolio, the stocks used to populate the portfolio had to satisfy the conditions of 
above average PIE ratio, above average EPS growth and above average Net asset growth. 
The Value pmtfolio had stocks that exhibited above average Dividend yield, below 
average PIE ratio and below average Price to Book ratios. The weights of the stocks of 
the portfolio were selected on the basis of minimizing variance using the Excel solver 
tool with the constraints of the stock weights being above or equal to zero due to the no 
short sales in the NSE and the second constraint was that the total weights should be equal 
to 1. The covariance of between stocks in each of the portfolios was calculated by the 
creation of a retum matrix and "MMUL T" and "TRANSPOSE" excel functions. 
24 
CII.\PTER 5. SuMivlAR\'. CONCLUSION AND RECO\L\IENDAT!ONS 
5.1 Introduction 
This chapter starts by giving a summary of the entire paper then goes ahead to give the 
conclusion and recommendations arrived at with regards to the objectives and finishes 
off with the limitations of the study. 
5.2 Summary 
The main aims of this study were to establish the effectiveness of the value and growth 
investment indicators in predicting value and compare the value and growth investment 
strategies against each other. Data from 2007 to 2016 is used. The investment style 
indicators' effectiveness is judged through the calculation ofHolding Period returns from 
2007 to 2016 and the performance between the value and growth investment styles is 
judged using portfolio returns based on the Markowitz portfolio theory and the 
calculation of Sharpe ratios. 
5.3 Concl usion and Recommendations 
The study concludes that when pursuing an investment style using style indicators the 
investor should consider a Low price to Earnings yield approach followed by the High 
dividend yield approach as they overall produce higher mean retmns. While the High 
price to earnings yield and High net asset approach produce the lowest mean returns and 
to compound the poor performance they are marred with also high volatility of returns. 
Regarding the performance of the Value investment style against the Growth investment 
style there is the confirmation of what the Academics worldwide agree on, which is that 
the Value investment style does overall outperform the Growth investment style on the 
basis of pmifolio return and Sharpe however there are instances when the Growth 
investment style does outperform the Growth investment style in the case of this study 
the results of 2007 are evidence. 
25 
With that being said these conclusions should not be taken as Biblical truths for frontier 
markets a recommendation would be on top of these investments styles an investor should 
consider more factors when choosing stocks to invest in ranging from Political factors of 
the country to macro factors such as GDP. 
5.-J. Limitations if the Study 
The main limitations of the study is that it does not capture the fees that an investor would 
have to pay in order to switch up his portfolio ,the broker' s commission and capital gains 
tax due to the varied nature of these costs as they depend on the broker selected. 
5.5 Recommendations Cor further study 
A good sequel to this study would be the inclusion of other investment styles such as the 
passive investment styles that rely on a benchmark and momentum investing compared 
to the investment styles discussed in this study. 
Also one should consider comparing the investment styles' performance with an 
investment strategy that applies macro factors such as GDP and inflation. 
26 
REfERENCES 
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Capaul, C., Rowley, 1. , & Sharpe, W. F. (1993). International value and growth stock 
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L VW Advisors. 
27 
Chan, L. , & Lakonishok, J. (2004). Value and Growth Investing: Review and Update. 
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28 
Append ices 
Appendi x I GrO\\th Po rtfo lios 
2007 
Net Asset 
Company EPS growth Growth PTOE HPR Weight 
ARM CEMENT 54.3478261 28.91919342 21.62888 0.170693 0 
DIAMOND TRUST BANK 39.6449704 76.14597171 12.71186 0.105509 0 
EAAGADS 14.3617021 86.62391101 37.74247 0.385678 1 
EACABLES 32.1428571 36.93556602 16.63873 -0.1467 0 
SCAN GROUP 23.1404959 28.18677363 12.87273 0.360489 0 
1 
2008 
EQUITY 55.2325581 31.25963666 13.83962 -0.00285 1 
KENOLKOBIL 43 .9929329 118.9989876 9.542647 -0.41435 0 
KENYA COMMERCIAL BANK 32.2147651 59.6932598 11.79188 -0.17735 0 
1 
2009 
ARM CEMENT 28.3464567 94.07034311 14.35575 0.333124 1 
1 
2010 
EABL 4.21711332 102.2214568 19.66798 0.245788 0.9999S 
SCAN GROUP 16.5745856 92.20413428 16.02364 1.448129 0 
STANDARD CHARTERED BANK 10.727056 46.08246486 12.89397 0.587962 0 
0.9999S 
2011 
29 
2012 
KENYA POWER 9.25925926 65.42851033 5.675354 0.163624 0 
DIAMOND TRUST BANK 28.4241532 60.66967806 7.191995 0.537308 1 
STANDARD CHARTERED BANK 34.6835443 48.6041189 8.834586 0.70223 0 
NICBANK 8.84476534 47.12240946 6.643952 0.721981 0 
KENYA COMMERCIAL BANK 10.483871 21.45090095 7.20438 0.865148 0 
NATION MEDIA 4.72440945 19.61812361 13.69682 0.870357 0 
EACABLES 51.3043478 19.15590498 6.929851 0.341065 0 
1 
2013 
SCAN GROUP 22.1719457 68.4164583 18.68356 -0.20188 1 
1 
2014 
CENTUM 20.4244032 48.59797602 13.43612 -0.23607 0 
DIAMOND TRUST BANK 1.43452106 35.87914811 10.11633 0.131905 1.00000 
SAFARICOM 29.5454545 13.66826575 20.28509 0.35373 -8.2E-O' 
1 
2015 
EAST AFRICA BREWERIES 37.7128954 29.66419698 28.77208 -0.15147 1 
1 
30 
r\ppcnclix 2 Value Portlolio 
2007 
Company Div yield Pto E Pto B HPR Weights 
WILLIAMSON TEA 3.640335 8.14 1.159404 -0.65854 1 
KENOLKOBIL 2.121141 11.78 0.958599 -0.11525 0 
1 
2008 
Company Div yield PtoE PtoB HPR Weights 
JUBILEE HOLDINGS 12.85856 6.535361 0.909778 -0.02324 0 
EXPRESS KENYA 6.488992 -9.39806 0.782159 -0.42422 0.999999 
PAN AFRICA INSURANCE 2.214533 -15.5779 1.401741 -0.29066 0 
0.999999 
2009 
Company Div yield Pto E Pto B HPR Weights 
SASINI 3.866602 2.798736 0.681954 0.57709 0.999999 
KENYA POWER 5.352364 0.435681 0.749772 0.393399 0 
KENYA AIRWAYS 4.371585 -2.28409 0.708872 1.212568 0 
0.999999 
2010 
Company Div yield Pto E PtoB HPR Weights 
JUBILEE HOLDINGS 9.481883 5.188332 1.421093 1.242465 1 
1 
31 
2011 
Company Div yield P to E Pto B HPR Weights 
UNGAGROUP 7.020828 3.033278 0.755512 -0.08417 1 
1 
2012 
2013 
Company Div yield P to E Pto B HPR Weights 
SAFARICOM 221.7255 7.052994 0.388714 3.284756 1 
1 
2014 
Company Div yield P toE Pto B HPR 
2015 
Company Div yield P to E Pto B HPR Weights 
SAFARICOM 172.0517 18.62813 0.35923 1.79 0.999998 
WILLIAMSON TEA 13.45442 -25.0253 0.422174 -0.21212 0 
0.999998 
32 
2016 
Company Div yield Pto E Pto B HPR Weights 
SAFARI COM 191.6694 5.931511 1.49716 5.78054 1 
1 
33