Still-rattled investors crowd onto the value bandwagon.
They were treated like rock stars in the late 1990s, but growth fund managers these days are singing the blues-and starving for fans. Value funds have just been that good.
In the overall scheme of things, five years may not be a long time. But
for growth managers, and the investors who have relied upon them, it's
a block of time that's probably seems to have taken on epic proportions.
Since 2000, when the high-tech bubble exploded, growth funds have yet
to overcome the returns and, perhaps more important, the perceived
safety of their value investing counterparts. According to some
measures, value has outperformed growth by an average of 15% a year.
As value has chugged along-helped in the last 18 months by a surge in
oil prices-growth has been struggling to redefine itself. Indeed, solid
performers can be found within growth. Yet, taken as a whole, it
certainly lacks the sizzle that defined it in the late 1990s.
Investors' memory of the recent past, in fact, may be growth
investing's most vexing problem. Growth managers, observers say, are to
a large extent still feeling an Internet bubble backlash. Speculation
and the quest for high returns have since taken a back seat to safety
and capital preservation. It's an attitude that fits value investing
like a glove, they note.
"From the fund side there appears to be a fair amount of wound licking
going around," says Andrew Clark, senior research analyst at Lipper.
"People are still wary of the stock market. When people have gotten
that badly burned, they are going to go with safety."
The gap between value and growth has grown so wide that it has reached
unprecedented proportions, even more than when the roles of growth and
value were reversed in the 1990s, notes Ernie Ankrim, chief investment
strategist for the Russell Investment Group.
Through the 60-month period comprising February 2000 to February 2005,
the Russell 1000 Growth Index had an annualized loss of 10.5%, he says.
By comparison, the Russell 1000 Value Index had an annualized return of
5.5%.
That gap of 16% per year for 60 months is the largest differential,
covering the longest period, since at least 1979, which is as far back
as the index data goes, Ankrim says. "On a longer-term perspective,
this is really an astonishing period of outperformance," he argues.
Yet what that means for the future is a matter of guesswork. It seems
that for everyone on Wall Street who says value has reached its peak,
you can find a value proponent who feels there are no indicators that
point to a slowdown in value.
The returns in 2005 so far support the value proponent's view.
Through the period ending February 28, value has beaten out growth in
every capitalization tier. The largest gap was in the large-cap sector,
where the Russell 1000 Value Index had a year-to-date return of 3.31%,
compared with 1.06% for growth. The tier that was closest to parity was
in small caps, where the Russell 2000 Growth Index had a return of
1.37%, slightly trailing value's 1.99%.
Also noteworthy is the fact that large-cap stocks outperformed small caps for the third consecutive month in February, after six consecutive years of small-cap outperformance, largely through the performance of value stocks in the oil and energy-related sectors.
There also hasn't been any indication that investors are diverting money to growth in expectation of a reversion to the mean, says Clark of Lipper.
"From a flow standpoint, we're definitely not seeing that," he says. "We are still seeing safety and soundness. Since January, it's basically a repeat of 2004, which is that people don't want to take capitalization risk."
Although investors can find growth stocks that are performing well, the sector as a whole is still muted due to a lack of any hot sectors and a general perception that growth is riskier than value, he says. Clark notes that large-cap growth funds still have 25% of their holdings devoted to information technology, at a time when many investors are still wary of anything related to technology.
Large-cap value funds, by comparison, have about a 10% exposure to information technology, he says. "There's nothing in the technical indicators that I see that says the reversion is coming," Clark says.
From a strictly historical perspective, however, some observers see the market in a teetering position when it comes to the balance between growth and value. One comparative measure, says Ankrim, is the price-to-sales ratio of the Russell 1000 growth and value indexes. Over the long term, the price-to-sales of the value index is about half that of the growth index. During the height of the dot.com market, in January 2000, value price-to-sales was about one quarter of growth's.
During this five-year run, however, value's price-to-sales has closed to two-thirds of that of growth, Ankrim says. That's an unprecedented level, he says. It's the type of disparity, he says, that can cause dangerous overreactions among investors-just as the run-up in growth's value did in the 1990s.