Growth Leads, But Don't Forget Value

11/15/2010


The strong relative performance of growth mutual funds in recent years invites an important question: Will they continue their run?

The short answer: Nobody knows. While growth stocks are capable of outperforming for extended periods, history suggests you should not count out value funds. Proper diversification dictates holding both types of funds. Consider the following:

• As the table below shows, value funds have outperformed growth funds in six of the last 10 years, including three consecutive years starting in 2000. Small-cap value funds outperformed in seven of the last 10 years and are slightly ahead of growth so far in 2010.

• Since 2000, growth funds have posted the best single-year return — but they also suffered the biggest losses in 2008, when the market cratered. While value funds are not immune to losses, they have finished fewer years in the red and outperformed growth funds in each of the last four down markets.

• Value funds have delivered far better annualized returns since 2000, paced by the 9.2% gain for small-cap value. In contrast, large-cap growth delivered the worst returns among the fund categories we considered, posting an annualized loss of 2.1%.

Growth funds look like a timely bet given their recent gains. But since 2000, value funds have delivered superior performance. What’s an investor to do? Buy both.

Below are two top funds, one growth and one value.

American Century Heritage ($20; TWHIX), which invests in midsize growth stocks, has surged 25% this year, ranking it among the top 8% of its peer group. The fund held nearly 100 names on Sept. 30, with technology representing 27% of the portfolio, followed by consumer discretionary at 21%.


Up 19% so far in 2010, Heartland Value Plus ($28; HRVIX) is a standout small-cap value fund. With a fund rating of 97, Heartland ranks among the top 1% of its peers based on three-, five-, and 10-year performance.

VALUE VERSUS GROWTH
—————————————————————————— Total Return ——————————————————————————
Fund Category
Since
2000
(Annual.)
(%)
YTD
(%)
2009
(%)
2008
(%)
2007
(%)
2006
(%)
2005
(%)
2004
(%)
2003
(%)
2002
(%)
2001
(%)
2000
(%)
Large-Cap
Growth
(2.1)
12.0
35.7
(40.7)
13.4
7.1
6.7
7.8
28.7
(27.6)
(22.3)
(13.1)
Large-Cap
Value
2.6
9.8
24.1
(37.1)
1.4
18.2
6.0
13.0
28.4
(18.7)
(5.0)
7.9
Midcap Growth
0.8
18.1
39.1
(43.8)
15.1
9.0
9.8
13.2
36.0
(27.2)
(20.0)
(4.8)
Midcap Value
7.5
16.3
35.4
(36.8)
0.8
15.9
8.8
17.9
33.9
(13.3)
6.7
18.5
Small-Cap
Growth
1.9
18.3
35.5
(41.6)
7.6
10.8
6.0
12.4
45.5
(27.9)
(8.9)
(3.9)
Small-Cap
Value
9.2
18.3
31.3
(32.2)
(6.1)
16.3
6.4
21.1
42.4
(10.1)
15.9
18.6
S&P 1500
Index
0.9
12.5
27.3
(36.7)
5.5
15.3
5.7
11.8
29.6
(21.3)
(10.6)
(7.0)
Style in Favor
Growth
Growth
Value
Growth
Value
Growth
Value
Growth
Value
Value
Value

Best return in bold. Year-to-date performance through Nov. 8.

Source: Morningstar.

 

FORECASTS FUND RECOMMENDATIONS
Through Nov. 8, our recommended Growth Portfolio has returned 14.4% for the year, versus 11.1% for its benchmark portfolio. The Conservative Portfolio has returned 13.1%, versus 10.2% for its benchmark.
— Year-to-Date —
—– % of Portfolio –—
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating
American Century Heritage
($20; TWHIX)
25.0
A
8
9
91
Buffalo Growth
($24; BUFGX)
18.2
A
7
8
95
Dreyfus Small Cap Stock Index
($20; DISSX)
18.5
B
0
0
64
Fidelity Leveraged Co. Stock
($26; FLVCX)
15.3
D
0
0
46
Heartland Select Value
($28; HRSVX)
12.9
E
7
9
86
Heartland Value Plus
($28; HRVIX)
18.9
B
8
9
97
T. Rowe Price Int’l Discovery
($44; PRIDX)
18.4
C
5
6
65
T. Rowe Price New Horizons
($31; PRNHX)
23.1
A
8
9
99
Vanguard 500 Index
($113; VFINX)
11.4
B
5
5
62
Vanguard Dividend Growth
($14; VDIGX)
8.1
E
8
9
99
Vanguard Emerging Mkts.
Stock Indx. ($31; VEIEX)
19.1
C
0
5
88
Vanguard GNMA ($11; VFIIX)
7.9
B
5
0
90
Vanguard Inter.-Term Tax
Exempt ($14; VWITX)
5.7
C
0
0
76
Vanguard International Value
($33; VTRIX)
7.8
C
8
6
83
Vanguard Short-Term Invest.
Grade ($11; VFSTX)
6.0
B
0
0
82
Vanguard Total Bond Mkt. Index ($11; VBMFX)
8.4
D
15
0
70
Vanguard Total Int’l Stock
Index ($16; VGTSX)
11.0
B
6
6
92
Vanguard Wellesley Income
($22; VWINX)
11.0
B
0
6
99
Vanguard Wellington
($31; VWELX)
9.5
D
5
8
89
Wells Fargo Advantage High
Income ($8; STHYX)
14.2
C
5
5
57
* Year-to-date ranks through Nov. 8 from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%; E = bottom 20%. Fund ratings are percentile ranks based on our fund-rating system.


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