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.