In the realm of investment strategies, particularly within the context of the Chinese stock markets, two indices stand out: the CSI 300 Value Index and the CSI 300 Growth IndexAs we delve into the historical performance of these indices over the last two decades, one cannot help but be struck by the striking narrative they weave—one that champions the supremacy of value investing over growth investing.

Since their inception, the cumulative returns of the CSI 300 Value Index have grown by an astonishing 709.4%, translating to a compound annual growth rate (CAGR) of 11.3%. In stark contrast, the CSI 300 Growth Index, while boasting a respectable return of 391.0%, has only managed a CAGR of 8.5%. These figures starkly illustrate the long-term advantage held by the value-oriented approach, prompting a deeper exploration into the intrinsic qualities that underpin their respective performances.

To appreciate the nuances between these two indices, it is essential to understand their construction methodologies

Both indices are derived from stocks included in the broader CSI 300 Index, yet they emphasize different aspects of company performanceThe Value Index is comprised of the top 100 stocks based on a value scoring system that includes metrics such as dividend yield, price-to-book ratio, and price-to-earnings ratioConversely, the Growth Index prioritizes 100 stocks based on growth metrics such as revenue growth rate and net profit growth rate.

This distinction raises a fundamental question: how do these different approaches fare during varying market conditions? Observing the performance across bull and bear markets reveals fascinating patterns and trendsA key insight is that during pronounced downturns—specifically in bear markets, where the CSI 300 Index experiences declines of 20% or more—value stocks continue to outperform their growth counterparts

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For example, during the financial crisis of 2008, when the CSI 300 Index plummeted by 65.6%, the Value Index outperformed the Growth Index by 3 percentage pointsSimilar patterns were observed in the subsequent downturns of 2011, 2018, and 2022, consistently showcasing the resilience of value investing under pressure.

Conversely, during bull markets, which are characterized by substantial price increases, the dynamics shift slightlyIn six notable growth years where the CSI 300 Index surged by 20% or more, the Value Index only outperformed in two instances, suggesting that while value investing may lag during periods of exuberant growth, it remains competitive, often mitigating losses when conditions turn sourThis resilience is crucial for investors looking to preserve capital in volatile markets.

An intriguing pattern emerges when analyzing the remaining 10 years over the two-decade span

In this period, the Value Index managed to outperform the Growth Index in six years, delivering an average excess return of 10.2%. This indicates that even in mixed market conditions, value investing tends to shine, providing a foundation of security and consistent returns.

Delving into the mechanics behind the Value Index's favorable performance invites a closer examination of the principles guiding these investmentsIt is pivotal to dissect the factors contributing to the overall return: is it due to shifts in valuation, the underlying fundamentals, or a combination of both? A crucial part of this analysis can be undertaken by calculating ratios such as price-to-earnings (PE) and price-to-book (PB) over the corresponding period.

Between 2008 and 2024, the PE and PB ratios for the Value Index have notably decreased by 20.6% and 49.0%, respectively, illustrating that while the valuation ascribed to these stocks has diminished, the underlying fundamentals have flourished

During the same timeframe, the Growth Index's valuations have risen, indicating a trend where investors continue to pay a premium for perceived growth potential, often overlooking fundamental value metrics.

Indeed, the growth in the Value Index's financial metrics speaks volumes: net profit and net asset values have skyrocketed by 385.5% and 656.3%, representing CAGRs of 10.7% and 13.9%. In contrast, the Growth Index's corresponding figures are markedly lower, showcasing a divergence in performance through the lens of fundamental growth, not merely price movements.

However, it’s paramount to recognize that growth investing generally yields a higher return on equity (ROE), a characteristic that often seduces investorsThis raises an essential point that the relative performance isn't merely a reflection of underlying quality but significantly hinges on the valuation discipline adopted by investors