In a prior life I was a mutual fund portfolio manager. What was my biggest pet peeve?
In an industry obsessed with labels, I loathed Morningstar and its style boxes. Why?
Originally it was probably a good idea to make sense of a very crowded field. But the evolution and growth in importance of the style boxes resulted in portfolio manager group-think.
It was as if my entire brethren in the business had become catatonic managing their portfolios to fit the boxes, and then more importantly, somehow outperform each other within those boxes.
The dumbing down of active managers in some ways made the industry look like an index fund.
One could reasonably ask what was the point of active management in such a world.
I personally thought it all crazy and defined my own fund as searching for opportunity by hovering above the boxes like a hawk, then diving in for the kill when I found return potential no matter the box.
Today’s debate about growth and value reminds me of those days.
If you haven’t noticed, the pundits are all over this one, making it the debate the market issue of the day/week/month.
The collapse of momentum growth stocks combined with the outperformance of traditional value names in 2014 lifted the debate to the forefront.
While value is now leading the way, from a performance perspective should you really care?
The most articulate analysis and recommendation of the situation comes from Adam Parker, chief U.S. equity strategist at Morgan Stanley.
In examining similar markets when value outperformed growth, similar to what is transpiring today, his team found that newly minted or mixed growth stocks modestly outperformed what they described as persistent growth names — names classified as such for 48 months.
My interpretation is that within the tug-of-war between growth and value there is a sufficiently large grey area.
That grey area is where the mice are hiding.
So the answer to the debate about growth versus value is “yes.”
Confused? You should be. That’s what pundits will do to you if you listen long enough.
Parker, though, has the right idea by targeting these mixed growth names.
Some of his favorites in this category include Boeing (NYSE: BA), Visa (NYSE: V) and Bristol-Myers Squibb (NYSE: BMY).
One way to describe these three names is growth at a value price.
What I like most about the list is that investors are not going to get hurt owning these names — or at least will be hurt less in a severe downdraft in the market otherwise known as a correction.
More importantly, the objective of any investor is to make money and to make money in stocks one of two things are needed: price-to-earnings expansion or profit growth.
Price-to-earnings expansion does not appear likely in this environment, thus profit growth is a must.
These three stocks offer just that, and as such, should outperform the rest of the market.
If the gyrations of 2014 have you pulling your hair out, a rational approach to the growth-versus-value debate as offered up by Parker and his team at Morgan Stanley is the right approach!