First, let’s establish the difference between growth and value companies.
Growth companies are businesses with growing revenues and profitability. These tend to be smaller companies aiming to grow into larger businesses, although large businesses can also be considered growth companies. If a growth company is profitable, they take all their profits and reinvest them back into the business. If they’re not profitable (which is common), these companies usually take on significant debt and/or raise capital by selling stock. Because of this, growth companies rarely pay cash dividends to shareholders. Busineses that are considered growth companies:
Value companies are typically well-established businesses with consistent profitability. These businesses are usually beyond their significant growth phase, and therefore don’t require a significant amount of capital (money) to expand the business. Due to the lack of opportunity for future significant growth, the stock market tends to undervalue these companies (hence the name ‘value company’). Significant portions of value company profits are distributed to shareholders in the form of cash dividends. Businesses that are considered value companies include:
- Proctor & Gamble
Growth funds invest in growth companies, while value funds invest in value companies. While there are clear differences between growth and value, some companies could be considered both. For example, Wal-Mart is a large, well-established company that pays regular cash dividends to its shareholders (value). At the same time, Wal-Mart is aggressively amping up their online marketplace to compete with Amazon (growth). Therefore, Wal-Mart may subjectively be considered a value company to some investors, and a growth company to others. Sometimes the differences are subjective.
Even if there are overlapping investments between a growth and value fund, I’d still assume they provide diversification. Funds typically have dozens, if not hundreds of different investments in their portfolio. If a handful of stocks in a growth fund overlap with a value fund, I wouldn’t consider it a big deal. Both still provide diversification.
I hope this helps!