With the Red Sox at last having retired their curse in 2004, the pressure to break out has settled on another group of longtime underperformers: big-cap growth funds.
The category has done poorly ever since tech finished its record run in early 2000. These funds, which invest in what they see as fast-growing companies with market capitalizations above $10 billion, have managed to shrink substantially over the last five years, returning a negative 6.25% annually on average. That makes them the third-worst-performing group out of the 20 categories tracked by fund watcher Morningstar.
But of course, long marches in the wilderness are often the prelude to strong runs in the black, and fans of the category feel certain that next year will bear them out.
"Large-cap growth is poised to perform in 2005," says Larry Puglia, portfolio manager for the $8 billion
T. Rowe Price Blue-Chip Growth fund. "It has been out of favor for a number of years now and the earnings growth relative to valuation is attractive vs. other sectors of the market."
Echoes David Scott, portfolio manager for the $200 million
Chase Growth fund, "Earnings momentum and the declines from the bear market set small-caps up for a huge rally these past few years. But now large-cap growth stocks are reasonably priced and have the stable earnings growth to take the lead."
If they do, it'll be about time. The average large-cap growth fund is up 6.7% this year -- which is a nice reversal from recent years' losses but still makes the large-cap growth funds the fourth-worst-performing category tracked by Morningstar.
Large-cap growth stocks and funds have been facing a double whammy over the past half-decade, as a soft economy and falling interest rates have vaulted small stocks over large ones and value over growth.
Small companies are typically more nimble than their bigger brethren, which enables them to outperform during economic slumps as well as in turnarounds. They also benefit from the lower cost of capital, which makes it easier to expand.
Generally, large-cap stocks take the baton from smaller ones during the latter stages of a recovery, when rates start moving upward in earnest. This is why many large-cap growth fund managers place part of the blame for their funds' underperformance on the
and its measured stance toward rate hikes.
After all, fans note, large-cap growth stocks grabbed their glory during the late 1990s after a slew of Fed rate hikes in 1994 zapped small-caps into submission.
As Duncan Richardson, portfolio manager for the $3.7 billion, large-cap
Eaton Vance Tax-Managed Growth fund, points out, the Russell 1000 Growth index outperformed the Russell 1000 Value index by an average of 7 percentage points from 1994 to 1999.
"They were firing value managers because they were only up 23%," notes Richardson.
Value managers should feel more secure in their jobs these days, though, as the spread has substantially reversed. Indeed, value leads growth by 11% per year since 2000. Year to date, the Russell 1000 Value index is up close to 15%, while the Russell 1000 Growth index has climbed just 5%.
Ironically, large-cap growth managers believe valuation is the central reason why their funds will gain traction in 2005. Alec MacMillan, portfolio manager for the $950 million
Columbia Large-Cap Growth fund, says growth stocks typically trade at a 40% premium to value stocks, a gap that yawned as wide as 80% in 2000 just before the bubble popped.
MacMillan currently calculates the growth premium to be 35%, the lowest since 1980.
"It's rather simplistic to say, but we're due for some outperformance," says MacMillan, who is loading his fund with shares of electronics retailer
and medical device manufacturer
Not everybody is convinced that 2005 will be the year large-cap growth funds break their losing streak, however. Sam Stovall, chief investment strategist at S&P, says the third year of a bull market tends to be tricky for large-cap stocks, with an average
return of 3%.
"Overall returns get more challenging as the stock market advance ages," says Stovall. "More often than not, large-cap stocks are flat to down in the third year of a bull market." Stovall predicts the S&P will close 2005 at 1300, 8% above today's level.
If Stovall is cautious, Lipper strategist Andrew Clark is downright skeptical -- not just of large-cap growth, but of the bull market.
"Large-caps have gone sideways over the last three years and are still lower than where they were in 2000, which means we are in an overall bear market," says Clark. "In the past two serious bear markets, small- and mid-caps beat large-caps, and that will continue through next year."
Doubters like Clark, however, don't seem to be affecting the optimism of fund managers like Bill Page of the $21 million
( SSLOX)State Street Large-Cap Growth Opportunities fund. Page is stocking up on traditional favorites like
ahead of what he expects to be a big year for companies that are better capitalized to weather higher interest rates ahead.
He also likes
with its increasing focus on dividends -- putting it in a club well frequented by larger companies with long histories of growing earnings.
"It's not about multiple expansion anymore," says Page. "It's about earnings and dividends."