March 12, 2012 / 4:01 AM / 5 years ago

LIPPER: Value, growth duke it out for supremacy

5 Min Read

NEW YORK, March 12 (Reuters) - It's a debate as old as iconic investor Ben Graham himself: Are you a value investor, attracted to stocks that have been unfairly overlooked and are selling at a bargain? Or are you a growth investor, willing to pay a healthy price to ride the momentum of a hot business?

Here's a little secret, according to Lipper's winning fund shops: Growth versus value isn't always an either/or proposition.

"I've never really been a fan of those labels," says George Sertl, a portfolio manager at Artisan Partners, whose Artisan Value fund took home top honors in the large-cap value category on Thursday from Lipper, a Thomson Reuters company. "We actually love growth stocks too, with great balance sheets and return on capital. We just like to buy them at value prices."

Exhibit A: Apple, the sizzling tech name that's usually classified as a growth stock. Because of its still-modest price/earnings ratio, though - barely above 11 for 2012 - it can also reasonably be termed a value play, which is why it pops up in Artisan portfolios as well.

In fact, neither growth nor value had a knockout year. In the one-year period leading up to mid-February, value and growth strategies were locked in a virtual dead heat, according to Lipper data. Each strategy had its moments in 2011: An economic recovery tentatively took hold, but enormous risks still loomed in the form of euro zone debt, which meant that investors couldn't decide whether to load up on risk or to back away from it.

"The year had so many twists and turns that it's hard to declare a clear winner," says Jeff Tjornehoj, head of Lipper Americas Research. "There were moments when the value side was outperforming growth, but in the end a lot of growth strategies were starting to assert themselves. When all's said and done, value probably ended up slightly ahead for 2011."

That's music to the ears of fund managers at Artisan. The secret to the firm's success? Sertl singles out Artisan Value's concentrated portfolio - only about 35 high-quality, cherry-picked companies with low debt, robust return-on-equity and affordable valuations. The result is what Sertl calls a "conglomerate" that he's comfortable with, even in the toughest of economic times.

Artisan Value wasn't the only value-oriented Lipper honoree, though. Other winners: Huber Capital Small Cap Value, Flex-funds Quantex Fund for midcaps, and Oceanstone Fund for multi-caps.

Growth Is Good, Too

As solid as those winning results were, though, it would be unwise to overlook growth investing. In fact, so far in 2012, the strategy has been outpacing value and already racked up double-digit gains, according to Lipper.

That's gratifying to Tim Paulin, who helps lead Touchstone Investments, another Lipper winner. (Its winning fund, Touchstone Sands Capital Institutional Growth, is sub-advised by Arlington, Va.-based Sands Capital Management.) Ironically, the large-cap fund boasts a similar approach to value-conscious Artisan: Owning companies that are strong enough to withstand whatever wicked economic storms may be brewing.

"In difficult environments, the only things that hold up are companies perceived to be of lasting value," says Paulin, Touchstone's vice president of investment research. "If there's any sign of weakness, investors run away from those firms in droves. But a company like Apple just continues to churn along, no matter what's going on in the world."

Rather than obsessing over daily price movements, it's the health of the underlying business that really interests Paulin. That's what led the team to winning picks like Illumina, a genome-mapping firm that was recently approached by Roche Holding as a takeover target.

Other standout growth funds that landed atop the Lipper board: Alliance Bernstein Small Cap Growth Portfolio I (QUAIX), Delaware Focus Smid-Cap Growth Equity Portfolio, and the multicap Berkshire Focus Fund.

But the question remains: Which strategy will reign supreme in 2012, growth or value? Just like the fund managers themselves, Lipper's Tjornehoj warns against getting trapped within a style box. "The lines between growth and value have been blurred considerably over the last several years," he says. "We haven't seen growth names get out of reach. There aren't too many stocks with price/earnings ratios over 50, the way we used to see in the dot-com boom.

"But whatever your approach, growth or value, keep in mind that it's not just about large-cap stocks. This current recovery is actually being led by small-caps: So instead of just focusing on Apple, start thinking about who the next Apple will be."

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