May

23

Value Mutual Funds

Posted by cameron

May 23, 2007 |

As a holder of both large cap growth oriented funds and the more steady Value funds I have been interested to understand why value funds have outperformed the so-called growth funds. Looking at history it seems there was always a Ying and Yang relationship between the two styles of investing. Growth funds would outperform for a while and then value funds would take a turn. The market would cycle like this because one type would become overpriced versus the other. Run-ups are like that. I can remember at the height of the tech bubble that people were saying that growth was the only show in town. That lasted until the bubble burst around the year 2000. Everything slumped, but highflying growth stocks came down the hardest. That time was the start of a shift to value stocks.

The traditional cycling from growth to value was amplified by the height of the tech bubble. It seems natural that it should be followed by possibly the longest sustained drive by value stocks that has been seen in decades. But just as the height of the growth stock bubble was its eventual undoing, the unusual length of the value stock run is almost the same. In the nineties the Bull Run for growth stocks was about six years. The current Bull Run for value stocks is approaching that same number. One big difference was the feelings that people had about growth stocks after the bubble burst. Growth went from “the only show in town” to having something of a bad name. Feelings play a part in moods of the market and it has taken a long time to shake that negative feeling off.

Valuation differences between the two styles became so great in the late nineties that a market fracture and massive swing in the opposite direction could be seen as inevitable. Likewise, the extended run by value stocks may be getting into that same place where they are overvalued versus the other. No one can predict with certainty but it is true that the highest flyers tend to fall the hardest.

My current thinking is that there is a correction coming and that post correction it is probably time to overweight in growth again. That’s my take for what its worth.

Value Investing at Fidelity

Growth Investing at Fidelity


Comments

2 Comments so far

  1. Empty Nest Garners Wall Street Journal Link : Content Quake on May 29, 2007 12:16 pm

    [...] a quick fyi that Empty Nest got linked over from the Wall Street Journal for a post on Value Mutual Funds.  The Wall Street Journal Linked on an article entitled “Manager Struggle to Locate Cheap [...]

  2. TheFinancialWhiz.Com » Carnival of Investment Strategies - June 20, 2007 on June 20, 2007 7:04 pm

    [...] presents Value Mutual Funds :: Empty Nest posted at Empty Nest, saying, “Taking a look at why value funds have outperformed the [...]

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