With growth-oriented stocks poised to make a comeback, many mutual fund companies may soon be forced to weigh the power of lessons learned from the burst of the dot-com bubble against the allure of growth.
Since the boom-bust era of technology stocks in 1999 and 2000, some of the nation’s biggest fund companies have shifted significant assets into value stocks.
The shift was fueled in part by the companies’ desire for more diversification and in part by the fact that value stocks have generally outperformed growth stocks for much of the past seven years.
At the end of July, Putnam Investments, which devoured growth stocks in the late 1990s, had 58.1% of its assets in value stocks, compared with 29.4% at the end of 1999, according to Financial Research Corp. MFS Investment Management had 45.5% of its assets in value stocks, up from 1% in 1999, according to FRC. All three firms are located in Boston.
“It has been a very conscious effort here for the last 10 years to talk about [ourselves] as a global asset management company and not just a growth manager, not just a value manager and not just a fixed-income manager,” said Jim Jesse, president of MFS Fund Distributors Inc., the company’s distribution arm. “We have a much healthier blend.”
That said, he acknowledged the temptation of chasing performance.
“It takes a bit of [a] longer-term, more disciplined approach not to do that,” he added. “I think we will stay balanced.”
It remains to be seen whether any fund company that has made an effort to become more diversified in recent years will continue along that path.
“When growth starts to do well, I think incrementally, you’ll see an increase in the number of growth offerings,” said Roy Weitz, publisher of FundAlarm.com, an online newsletter in Tarzana, Calif. “They’ve said too many times they’ve learned their lesson, and they never do.”
Preaching diversification
To be sure, not all big fund companies have experienced significant swings in asset allocations over the past seven years.
The Vanguard Group Inc. of Malvern, Pa., for example, had 65.3% of its assets in value-oriented stocks at the end of July, compared with 52.8% at the end of 1999, according to FRC.
“We work to practice what we preach, and what we preach all the time is diversification,” said Joel Dickson, principal of the Vanguard Quantitative Equity Group. “We have spent a lot of time over the last many years offering our investors a wide range of investment options that span all styles.”
Of course, it doesn’t help that mutual fund shareholders are also lured by performance. Over the past several years, for example, more money has flowed into Vanguard’s value-oriented funds than has gone into its growth-oriented funds, Mr. Dickson said.
“We are trying to get shareholders to focus on what is going to be the best array of products that will bring them value over the next 20 years,” he added. “Trying to predict growth versus value is fraught with risk.”
Valuable lesson
Some financial advisers think the fund companies that got hurt by investing too heavily in growth the last go-round have learned a valuable lesson.
“Building out their product lines to have a full range of products and withstand whichever way the market is going is in their best interests,” said Bob Glovsky, president of Mintz Levin Financial Advisors LLC of Boston. “They are trying to have more products, and that will insulate them.”
Chuck Neff, a wealth manager at Balasa Dinverno & Foltz LLC of Itasca, Ill., agrees.
“The benefit of diversification has been returned to the table,” he said. “It’s in their best interest to have a full menu.”
“If you’ve got an investment process that has proven successful over time, it seems very difficult to keep changing hats,” said Jeff Bernier, managing director at TandemGrowth Financial Advisors LLC in Roswell, Ga. “A lot of them got burned in the late 1990s.”
Demographics may also play a part in keeping fund companies from investing too heavily in growth again, said Stuart Speer, a financial planner at Heritage Advisors LLC in Overland Park, Kan.
As baby boomers age, more will look for greater balance in their portfolios, he said.
“It would be foolish not to trim your sails to the pre-retirement market, he added. “Growth will always be a part of those retirement accounts, but they will be casting their eye toward: How do we make this more like a guaranteed investment?”
No matter what, a return to growth is clearly in the works, according to some portfolio managers.
“I think we’ll see this trend for a number of years,” said Shigeki Makino, portfolio leader at Putnam Global Equity Fund (PEQUX). “Once the trend is clear, then assets will start to flow; it takes a couple of years to gain traction.”
Growth fund managers such as Boston-based Columbia Management Group Inc.’s John Wilson, a senior portfolio manager at Columbia Large Cap Growth Fund (CLCGX), said that it is difficult to predict the timing of trends. “The way the stars are aligning right now, things are looking better for growth than anything in the past five years,” he said.
Sue Asci can be reached at
[email protected].
