April 5, 2007 / 11:34 AM / 11 years ago

Growth and value stock-picking styles converge

By Muralikumar Anantharaman - Analysis

BOSTON (Reuters) - An increasing number of fund managers are blending growth and value tactics to pick stocks, but this trend is not popular with some investors, who want to diversify by using two distinctive styles.

Morningstar has moved 41 equity mutual funds from the value category to classify them as blends in the past 14 months. Over the same period, 13 funds have moved from the growth category to blend, and four funds have moved from growth to value styles, the fund research firm said.

Value stocks typically trade at lower multiples than growth stocks and pay high dividends. Growth stocks are pricier and are bought for their earnings potential.

As the two styles converge, value-focused managers are increasingly buying traditional growth stocks such as Microsoft Corp. (MSFT.O) and Dell DELL.O, while growth managers are snapping up value stocks such as Chevron (CVX.N).

“There are more value managers who are telling us that they are observing more opportunities among traditional growth stocks. So it does seem like the trend is accelerating,” said Christine Benz, director of analysis at Morningstar.

Since the 2000-2002 bear market, investors have favored traditional value plays such as utilities and financial stocks over traditional growth plays in sectors such as information technology and health care.

Burned by the tech bust, investors have been wary of growth stocks and have embraced value stocks as global economic growth has stoked demand for commodities.

Growth stocks have become cheaper, and value stocks have become pricier, narrowing the different in valuations between the two categories.


“Value has been such a strong hand in the past few years that everybody else is buying those book value names. And at the same time as people are looking to get those value names, they are refusing to bid up growth names to elevated levels,” said Jeff Tjornehoj, a senior research analyst at Lipper Inc.

The S&P Information Technology index .GSPT now trades at 20 times 2007 earnings, compared with 16.7 times for the S&P Utilities index .GSPU.

“Utilities and tech shouldn’t be that close. There’s a compression of valuations around the world,” said James Swanson, chief investment strategist at fund firm MFS.

The trend toward converging valuations has worried some firms such as Thrivent Investment Management, which last month dropped a manager who used a traditional growth approach on a $1 billion international portfolio and instead picked a growth manager who also emphasizes price momentum.

    “Our quantitative staff did some research that showed there was a lot of correlation between what people consider growth international stocks and value international stocks. So then we started thinking, maybe it’s investment management style beyond growth and value that would be more important,” said Patrick Egan, Thrivent’s director of asset management marketing.

    From the other direction, some of the value funds that have moved to the blend category include value investor Bill Nygren’s $5.9 billion Oakmark Fund and $6.1 billion Oakmark Select Fund as well as the $10.9 billion Longleaf Partners Fund, Morningstar’s Benz said.

    So is the distinction between growth or value styles becoming irrelevant to investors?

    Standard & Poor’s doesn’t think so, because institutions are still making tactical asset allocations based on growth and value.

    “If you are making tactical bets, then it becomes crucially important that those tactical bets stay uncorrelated, or less correlated with each other,” said Srikant Dash, an index strategist at S&P.

    Dash said S&P’s “pure” growth and value style indexes have attracted more than $1 billion in assets since their launch about a year ago. The indexes have been built by excluding firms that exhibit both growth and value characteristics such as Microsoft, Chevron, General Electric (GE.N), Pfizer (PFE.N) and Intel (INTC.O) from the list of constituents.

    Joshua Byrne, a fund manager at Putnam Investments, said the current market environment gives growth stocks an edge over value picks and has enabled him to buy underpriced stocks such as Swiss-Swedish dental implants maker Nobel Biocare NOBE.VX and British credit information firm Experian (EXPN.L).

    “More and more we find (growth stocks) look, on a relative basis, better and more attractive,” said Byrne who co-manages a $6.8 billion international equity fund investing in both growth and value.

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