Big-Cap Growth Funds Hopeful
The restless kids in the backseat aren't the only ones howling "are we there yet?" nowadays. Investors in large-cap growth funds are also getting impatient as they await the long-promised turnaround in their funds' performance.
And like a worn-out parent behind the steering wheel, frazzled big-cap fund managers have only one answer: "Soon."
"Every day we don't see the transition from small-caps and value stocks to large-cap growth means we are a day closer," says Derek Scarth, portfolio manager for the $140 million
(WTEIX)
Westcore Growth fund. "And that's how long-term investors should operate."
It hasn't been an easy ride for Scarth and most other large-cap growth fund managers in the years since the collapse of the late-1990s bull market. And the losses, not the waiting, have surely been the hardest part of the journey.
According to fund tracker Morningstar, the average large-cap growth fund has lost 8.69% annually over the past five years. Those sorry results put the category in 18th place out of Morningstar's 20 stock classifications -- with only tech and telecom funds, the highflying leaders during the late great boom, faring worse.
Definitions for growth and value stocks vary on Wall Street, but growth companies are generally those whose earnings are expected to increase at an above-average rate. Value stocks, on the other hand, tend to have lower price-to-earnings and price-to-book-value multiples, as investors expect slower earnings growth ahead.
But small-cap value funds have soared in the postbubble period, rising 16.1% per year. Large-cap value funds have done their part, returning a reasonable 6.65%. Small stocks generally outperform large stocks during cyclical economic downturns and recoveries due to the nimble manner in which they can adapt to the changing business environment.
Sam Stovall, chief investment strategist at S&P, suggests that part of the problem facing large-cap growth stocks is that time has not sufficiently healed the wounds suffered by investors after the bubble burst.
"Analysts and managers lied to the investing public about earnings and growth during the 1990s boom," says Stovall. "It will take time for investors to feel comfortable about going into some of those formerly highflying growth stocks again after being let down so harshly."
And don't forget, growth did have a long, dominating six-year run.
According to Stovall's figures, the growth components of the
S&P 500
more than doubled the returns of their value counterparts from 1994 to 1999. The score was 302% to 139%, including a 1998 whipping that saw growth stocks return 41% vs. 12% for value.
It's been a vastly different story since, however, as growth stocks cumulatively lost more than 30% while value stocks eked out a small gain. Even in 2003, the first year of the current so-called bull market, value stocks in the S&P index rose 29% vs. 24% for growth names.
Many fund managers, however, now believe the inefficiencies of the bubble have been burned off and the tide may finally be turning back in favor of growth stocks.
Anna Dopkin, portfolio manager for the $1.8 billion
(PRGIX) - Get Report
T. Rowe Price Growth & Income fund, says she has already tilted her blended portfolio in favor of growth names like
Southwest Airlines
(LUV) - Get Report
, primarily because market sentiment has moved so far against them.
"If everybody thinks that growth won't work, that's the sure sign of a comeback," says Dopkin.
Likewise, Ron Canakaris, portfolio manager for the
(MCGFX) - Get Report
ABN AMRO/Montag & Caldwell Growth fund, says the overwhelming negative sentiment toward growth stocks will ultimately turn things in their favor. Although he won't predict when the shift will occur, he does expect a great deal of volatility to take place when the market finally makes its transition from the low-quality stocks that led the market's comeback to high-quality, steady growers like consumer products giants
Procter & Gamble
(PG) - Get Report
and
Johnson & Johnson
(JNJ) - Get Report
.
P&G and J&J are also top picks for Richard Skaggs, portfolio manager for the
(LSGRX) - Get Report
Loomis Sayles Growth fund, along with category killers
Dell
(DELL) - Get Report
and
Apple
(AAPL) - Get Report
.
Skaggs says part of his stock-picking strategy is not only to find companies that can grow earnings at a double-digit rate, but to avoid those names that are lumped into the growth category on account of their past glories as opposed to real performance. Some firms Skaggs puts in that "formerly known as growth stock" grouping include
Coke
(KO) - Get Report
and
Pfizer
(PFE) - Get Report
.
Skaggs is far from the only large-cap growth manager having to deal with the changing nature of growth stocks. It's a problem faced by most growth managers, now that last decade's tech highfliers like
Cisco
(CSCO) - Get Report
and
Microsoft
(MSFT) - Get Report
are back down to earth in terms of multiples and growth rates.
"The kinds of stocks considered as growth stocks have changed materially," says Kunal Kapoor, strategist at Morningstar. "It's not your technology and health care anymore.
"At the end of the day, it's all about an individual fund manager's expectations for growth," adds Kapoor. "And right now expectations have dropped significantly, which may be a harbinger of better days ahead."
Soon, kids. Soon.