Growth funds have not been immune to market volatility this year, but growth managers say they are staying the course and not changing their long-term investment strategies.
Morningstar reported that its U.S. large growth category was down 31% so far this year as of Oct. 17. This is more than twice as much as the U.S. large value category's 13.3% decline. Finally, the broad market S&P 500 was down 21.9% for the same period, said Katie Reichart, Morningstar's director of equity strategies.
She added that growth funds have struggled across the market cap spectrum, with the mid-cap growth category down 30.2% and the small-growth category losing 29.5%,
“Concerns about rising interest rates have continued weighing on growth stocks,” Reichart said. “What’s more, they had room to fall after a multiyear growth rally.”
Damon Ficklin, head of the large company growth team at Polen Capital in Boca Raton, Fla., said inflation is the “biggest factor” in the recent struggles of growth funds. The Fed's nterest rate increases have impacted valuations, which then altered the performance of many funds, including growth funds, he said.
“It’s not just this short-term move. There's a permanent expectation to it I believe in terms of stickiness of what has to happen,” he said. “It needs to result in some slowing down of inflation and perhaps some slowing down of the economy before anything changes course and that's caused a rerating of asset values across the board.”
David Welsh, partner and head of Tech Growth at New York-based KKR, said that the growth fund industry experienced significant opportunities about 36 months ago. That led to more hedge fund and public investors getting involved in the sector.
The way passive investors and short-term hedge funds approached this market was completely different from the traditional growth equity investing approach, which is more about being actively involved and investing in businesses for over a long period of time, Welsh said.
He added that these investors are more aggressive than the traditional growth fund investor. The average growth investor usually makes no more than 10 investments per year, while new investors were investing in hundreds of companies per year, Welsh said.
“For those of us that have been around awhile it was pretty easy to see from the outside that it was not a strategy that would likely last long because, like everything, these markets are going to have their ups and downs,” he said. “I don’t think any of us quite anticipated the down would come quite as rapidly as it did, but we knew it would be coming to some degree.”