More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
News and analysis from Standard & Poor's MarketScope Advisor
Among the dilemmas that haunt the world of investing, growth versus value is one of the most fundamental. Buy low and hope for a turnaround, or go with a proven winner, betting the streak will keep going?
There are various ways to answer the question.
Market forecasters often look to history as a guide for what might happen next, even as every investment advertisement carries the warning, "Past performance is no guarantee of future results." Still, history suggests value funds are the place to be; the value half of the Standard & Poor's 500 has outperformed its growth counterpart in first 12 months of a bull market almost every time since the 1970s, says S&P Chief Investment Strategist Sam Stovall.
While history is on the side of value, the STARS rankings published by S&P Equity Research suggest that growth stocks are more attractive right now. Within the S&P 500, growth stocks have a market-capitalization weighted average of 3.8 STARS, Stovall says, while value stocks have an average of 3.5. "Even though value has beaten growth in the past," Stovall says, "S&P equity analysts, through their time-proven STARS picks, actually look better for growth going forward." (STARS stands for STock Appreciation Ranking System, a proprietary stock-picking methodology from Standard and Poor's.)
The Importance of Current Holdings
With that in mind, it's worth reviewing a core portfolio holding for many investors, the large-capitalization growth fund. On September 12, S&P unveiled a new methodology for ranking mutual funds centered on the concept that attractiveness of a fund's holdings is as important, or more important, than the fund's relative past performance. S&P's fund rankings--from 5-star (highest) to 1-star (lowest)--now incorporate STARS rankings and S&P's proprietary Fair Value score for the fund's underlying holdings.
Among the 130 or so large-cap growth funds in the United States that have more than $50 million in assets, about 30 have S&P's highest 5-star rank. S&P's STARS rankings are a positive contributor to the score of about 10 of those funds, the largest of which is the $2.1 billion Aston/Montag & Caldwell Growth Fund (MCGFX), which, according to its prospectus, invests in "high-quality growth companies that are growing near-term earnings faster than the market and trading at a discount to their intrinsic value." As of August 31, the top two of its 34 holdings, accounting for about 9% of the fund's assets, were Hewlett-Packard (HPQ), which carries a "strong buy" recommendation from S&P Equity Research, and Apple (AAPL), which has a "buy" recommendation. The fund has an expense ratio of 1.08%, which is about average for the group, and is sold without a sales commission.
Considerably smaller is the $416 million Evergreen Strategic Growth Fund (ESGIX), which targets "long term capital growth" by investing in large-capitalization companies. Its top three holdings as of June 30 were Apple, IBM, which has a "strong buy" recommendation from S&P Equity Research, and Google (GOOG), which has a "hold" recommendation.
Another fund whose holdings are making a positive contribution to its S&P mutual fund rank is the TIAA-CREF Large-Cap Growth fund (TILIX), which has about $590 million spread across more than 80 different stocks. Its top holding as of June 30 was Microsoft (MSFT), which garners a "hold" ranking from S&P Equity Research, followed by Apple and then Gilead Sciences (GILD), which has a "strong buy" recommendation from S&P.
AllianceBernstein Large Cap Growth fund (APGYX) also wins a 5-star ranking from S&P's new mutual fund ranking methodology. This no-load fund invests its $297 million into just 61 holdings. The top 10 holdings alone comprise about half of the assets under management. Interestingly, of those top 10 holdings, seven garner a 4-STARS (buy) or 5-STARS (strong buy) ranking from S&P Equity Research: Apple, Goldman Sachs, Gilead, JPMorgan Chase (JPM), Hewlett-Packard, Teva Pharmaceutical Industries (TEVA), and Cisco Systems (CSCO).
One fund from the bigger, better-known fund families makes the cut: American Century Capital Growth (APWRX). This no-load fund requires a minimum initial investment of $2,500, and diversifies its assets under management across 104 stocks. The top 10 holdings make up slightly more than one-quarter of the fund's assets. Six of those top 10 holdings garner positive recommendations from S&P Equity Research: Apple, Coca-Cola (KO), IBM, Abbott Laboratories (ABT), Procter & Gamble (PG), and PepsiCo (PEP).
Stock Picking Prowess
Why is S&P so convinced this holdings-based fund ranking methodology is better than one based only on past performance? The answer lies in part in the proven performance of S&P's STARS method for picking stocks. On an annual basis, since inception in 1987, Standard & Poor's "strong buy" recommendations outperformed the S&P 500 17 times.
If someone invested $100 when the S&P 5 STARS model launched, it would have been worth $1,435 at the end of July compared to $408 if invested in the S&P 500 index for the same time period.